By: CA.

Pankaj Garg

Part – I
Multiple Choice Questions
Chapter – 1: Quality Control and Engagement Standards

1 PMP Ltd. is an associate of PMP Inc., a company based in Kuwait. PMP Ltd is listed in India having its
corporate office at Assam. The company’s operations have remained stable over the years and the
management is looking to expand the operations for which the management is considering different
business ventures.
The company’s auditors issued clean audit report on the audit of the financial statements for the year
ended 31 March 2022.
For the financial year ended 31 March 2023, the auditors made some changes in their audit team.
While the audit partner remained the same, the field incharge has been replaced, as the field
incharge who was engaged in the audit of the financial statements for the year ended 31 March 2022
has left the firm. The audit team has a new person as External Quality Control Reviewer (EQCR) who
has specialized knowledge of the industry in which the company is operating. EQCR has been
employed with the firm for over 2.5 years and is yet to clear his CA (Chartered Accountancy) final
exams. The changes were made on the basis of the consideration that the firm has enough experience
of engagement with this client.
The audit team commenced the work for audit of the year ended 31 March 2023 after detailed
planning and it was observed that EQCR had various comments on certain matters which were not
accepted by the audit partner. Audit partner had better understanding of the client and after
assessing the comments of the EQCR did not find those relevant.
The audit partner without concurrence of the EQCR finalized the audit and issued the audit report.
In the given situation, please advise which one of the following is correct?
(a) The changes in the audit team were not appropriate except for the field incharge who had left the firm.
EQCR should have been a member of the Institute of Chartered Accountants of India (ICAI).
(b) The audit partner did the right thing by ignoring the comments of EQCR as he is the final authority to
decide on any matter and take decisions. Further EQCR was junior to the audit partner.
(c) The audit partner must discuss each and every comment of EQCR with the client and ensure that a
proper disclosure in respect of those points should be made either in the financial statements or the
audit report.
(d) EQCR had sufficient and appropriate experience. He should have been given the authority to objectively
evaluate various matters, before the report is issued, the significant judgments the engagement team
made and the conclusions they reached in formulating the report. By ignoring the comments of the
EQCR, audit partner took additional professional responsibility on himself. By considering the
comments of EQCR, he could have passed the responsibility to EQCR.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
2 ZOV is a private limited company engaged in the business of mining. The company’s operations are
fairly large and its turnover is INR 4,000 crore on an annual basis. Due to the nature of the business
and the size of the company, the company has appointed a firm of Chartered Accountants as its
statutory auditors who have the relevant experience of the industry in which the company has been
operating.
During the course of the audit of the financial statements for the year ended 31 March 2023, the
audit team had various observations which resulted in many adjustments in the financial statements
of the company and that was also appreciated by the CFO of the company.
At the time of final reviews of the audit team, the audit partner requested working paper on final
analytical procedures from the engagement team, however, the engagement team explained that
they performed substantive testing procedures which also resulted in some adjustments and the
same was incorporated in the final set of financial statements given to the audit partner for the
review and accordingly there was no need to perform final analytical procedures. Audit partner was
not convinced with this and requested the engagement team to perform this procedure. Considering
that the timeline to conclude the audit was approaching, the audit partner also requested the CFO
that the audit team would need some more time to perform final analytical procedures. CFO was very
impressed with the engagement team and agreed for the time but he also told the audit partner that
work of the team was excellent and hence the audit partner should avoid these additional
procedures.
You are requested to give your view in respect of this matter as per SA 520.
(a) The explanation of the audit team was correct. After doing substantive testing which also resulted in
audit adjustments, there was no need to perform final analytical procedures.
(b) The suggestion of CFO should have been considered by the audit partner as the CFO was observing the
work of the engagement team and hence he could assess that better than the audit partner.
(c) The requirement in view of the audit partner was valid. The conclusions drawn from the results of final
analytical procedures are intended to corroborate conclusions formed during the audit of individual
components or elements of the financial statements.
(d) The audit team did the right thing by not performing final analytical procedures, however, one
additional procedure in that case should have been - obtain the document containing the analysis
performed by the client on the financial statements. This document is required to be assembled in the
audit file.
3 BDJ Private Ltd. was established in 2001 and since then the company’s operations have grown
significantly. The company is based in Kanpur and has branch offices outside Kanpur. The company
is engaged in tours and travels business and because of the nature of the business, it has voluminous
transactions. The annual turnover of the company is INR 700 crore.
During the audit of the financial statements of the company for the year ended 31 March 2023, the
auditors observed wide variation in various details of sales and various expenses as compared to last
year. Various balances of trade receivables, loans and advances, statutory liabilities showed
significant increase and many balances were found to be non-moving which were aged for more than
3 years.
On the basis of the materiality and planned procedures, the audit team requested the client for
testing of various samples for sales, expenses etc. The client observed that the number of samples
that the team has requested increased as compared to last year and asked the team to cut down on
the number of samples so that it is the same number of samples which were tested in the previous
years.

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Part I – Multiple Choice Questions
The audit team did not agree with this and explained various factors which the team had considered
for sample selection and the reasons for changes in the samples and also explained the requirements
of SA 530 to the client but the client still did not agree.
Now there is a situation of deadlock and you are requested to provide your guidance to resolve this
matter.
(a) The argument of the client is not valid. Sample selection is based on certain principles as per SA 530
and that is on the assessment of the audit team. It may change year on year and hence the client should
provide the required information to the audit team.
(b) The explanation of the audit team is not valid. Referring SA 530 was not correct in this case. The audit
team should have explained their entire approach around risk assessment to the client before starting
the fieldwork and should have formally shared that with the client in writing.
(c) In the given situation, the audit team instead of getting into any arguments should cut down the
number of samples and should increase their procedures around analytical work. That would resolve
the problem.
(d) The audit team should make a formal request in writing for these details from the client and if the client
still refuses then they should report this matter to the audit partner. In that case, the auditing
standards require audit partner to check some of the documents which may not be provided by the
client to the audit team.
4 MNO Ltd. is a company engaged in the manufacture of Kids toys. The company sells its goods on
credit basis. M/s. Ajay Vijay & Associates have been appointed as statutory auditors of MNO Ltd. for
the FY 2022-23. During the course of audit, CA Ajay, the engagement partner asks the management
about the email addresses of trade receivables of the company for the purpose of obtaining balance
confirmation from the trade receivables. The management of the company asked its sales supervisor
to send confirmation request to the trade receivables and collect all the responses and provide all
such responses to the auditor. The management of MNO Ltd. also informed CA Ajay that confirmation
with respect to two of its trade receivables namely Sports Star Ltd. and Kids Zone Ltd. won’t be
available as a dispute between MNO Ltd. and both the trade receivables is going on. With respect to
other trade receivables, the sales supervisor provided CA Ajay with all the balance confirmation.
With respect to the balance confirmation request, which of the following is warranted as per the
requirement of the relevant SA?
(a) CA Ajay should not have relied on the explanation provided by the management with respect to the
trade receivables namely Sports Star Ltd. and Kids Zone Ltd. and he should perform alternative
procedures with respect to such trade receivables.
(b) CA Ajay should have obtained direct response from all other trade receivables instead of sales
supervisor receiving direct responses from trade receivables and providing them to the auditor.
(c) Both (a) and (b).
(d) CA Ajay should give a qualified opinion as balance confirmation with respect to two trade receivables is
not available.
5 M/s ABC & Associates are the statutory auditors of PQR Ltd. for the FY 2022-23. While conducting the
audit, CA Aman, the engagement partner noticed the following:
• Payments of various fines and penalties
• Unusual cash payments
• Payments to various government employees not supported by any document
• Notices received from various regulatory authorities.
• Heavy payments to legal counsels.
• CA Aman should consider the above as indicative of:

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Part I – Multiple Choice Questions
(a) Doubt on Internal Controls of PQR Ltd.
(b) Doubt of non-compliance to laws by PQR Ltd.
(c) Doubt on the accounting system of PQR Ltd.
(d) Doubt on the going concern assumption of PQR Ltd. [RTP-May 23]
6 Auditors do not normally examine all the information available to them as it would be impractical to
do so and using audit sampling will produce valid conclusions. Random selection ensures that all
items in the population have an equal chance of selection, e.g. by use of random number tables or
random number generators. Block sampling method includes selection of a block or blocks of
continuous items from within the organisation. Which of the following selection can be considered as
block sampling method?
(a) Auditor Mr. A divided the trade receivables into 2 groups as: balances above ₹ 20 lakh and balances
between ₹ 10 lakh to ₹ 20 lakh and selected different percentage of items from each group.
(b) Auditor Mr. A determined the starting point as 10 for the list of receivables and selected every 10th
balance for receivables thereafter as samples to perform the tests.
(c) Auditor Mr. A selected sample size as all the high-value balances from the list of trade receivables to
ensure that these balances shown are correctly recorded.
(d) Auditor Mr. A uses a sample of 50 consecutive cheques to test whether cheques are signed by
authorised signatories rather than picking 50 single cheques throughout the year.
7 Professional skepticism is defined as:
(a) An attitude to avoid significant mistakes which could influence the economic decisions of users taken
on the basis of the financial statements.
(b) The application of relevant training, knowledge and experience in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit engagement.
(c) An analysis of management decisions in terms of failed outcomes.
(d) An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of evidence.
8 Professional judgment is defined as:
(a) The application of relevant training, knowledge and experience, within the context provided by
auditing, accounting and ethical standards, in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit engagement.
(b) An attitude to avoid significant mistakes which could influence the economic decisions of users taken
on the basis of the financial statements.
(c) Decision making about the requirements of the accounting profession.
(d) An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of evidence.
9 Judgments about materiality are made in the light of surrounding circumstances, and are affected by:
(a) The auditor’s perception of the financial information needs of users of the financial statements.
(b) Both the auditor’s perception of the financial information needs of users of the financial statements, the
size or nature of a misstatement.
(c) The size or nature of a misstatement.
(d) The company’s control environment.
10 The following inherent limitations in an audit affect the auditor’s ability to detect material
misstatements except:

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Part I – Multiple Choice Questions
(a) Test and sampling.
(b) Audit process permeated by judgment.
(c) Poor corporate governance.
(d) Audit evidence.
11 Kshitij Private Ltd. is a company based out of Kochi having operations primarily in Europe. Because
of the nature of the operations of the company, it is required to prepare its financial statements as
per International Standards for reporting to the local regulatory authorities over there.
Since the business is based in Europe, the audit team is also required to visit the locations wherever
the company has offices and is accordingly, required to perform certain audit procedures over there.
During the audit of this company for the financial year ended 31 March, 2023, the auditors, who had
planned their work appropriately and had a large team for conducting the audit, were facing lot of
challenges at various stages.
They were also required to revisit their materiality level during the course of the work.
However, at the time of final reviews when this was discussed with the Audit Partner (Audit
Incharge), he was not convinced with the approach of the audit team wherein they reassessed their
plans continuously resulting in waste of time.
In this situation, please advise which one of the following would be correct.
(a) Audit Partner being the senior most team member is right and same thing should be considered by
audit team by documenting it in the audit file.
(b) Audit Partner’s view is not correct as the audit team did the right thing.
(c) Audit Partner was correct, however, during the course of an audit which required visits at various
locations it was mandatory.
(d) Audit Partner’s view is not correct because the materiality was revised by the audit team which is a big
thing and same should have been considered by the audit partner
12 AJ Private Ltd. is in the business of telecom and have significant operations across India
predominantly in Northern India.
The statutory auditors of the company have been continuing for the last 3 years and have been
issuing clean report.
For the financial year ended 31 March 2023, the statutory auditors commenced their work in March
2023 as per discussions with the management and with a plan to complete the audit by first week of
May 2023.
The audit team concluded the work as per the agreed timelines and the financial statements and
audit report were signed on 5 May 2023 along with the engagement letter for the financial year
ended 31 March 2023.
In the given situation, please advise which of the following would be correct.
(a) The engagement letter should have been signed before commencing the audit work.
(b) The engagement letter should have been signed at least a day before signing the audit report.
(c) The engagement letter should have been signed at least a day before signing the financial statements.
(d) The engagement letter is optional in case of a private company and hence can be signed anytime.
13 While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed company,
using a fair presentation framework, M/s Pintu & Co., a Chartered Accountant firm, discovered that
the consolidated financial statements are materially misstated due to the non-consolidation of a
subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial
statements. The effects of the misstatement on the consolidated financial statements have not been

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Part I – Multiple Choice Questions
determined because it was not practicable to do so. Thus, M/s Pintu & Co. decided to provide an
adverse opinion for the same and further determined that, there are no key audit matters other than
the matter to be described in the Basis for Adverse Opinion section. Comment whether M/s Pintu &
Co. needs to report under SA 701 ‘Communicating Key Audit Matters in the Independent Auditor’s
Report’?
(a) M/s Pintu & Co. have the option to follow SA 701, thus, need not to report any key audit matters.
(b) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters
other than the matter to be described in the Basis for Adverse Opinion section, no ‘Key Audit Matters’
para needs to be stated under audit report.
(c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters
other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu & Co. shall
state, under ‘Key Audit Matters’ para, that ‘except for the matter described in the Basis for Adverse
Opinion section, we have determined that there are no other key audit matters to communicate in our
report.’
(d) M/s Pintu & Co. is under compulsion to follow SA 701 as the audit is of a listed company and shall
report under ‘Key Audit Matters’ para the matter same as stated in ‘Adverse Opinion’ para regarding
non-consolidation of a subsidiary.
14 Entity P, is audited by a different auditor than the parent entity Q. The principle auditor i.e. the
auditor of entity Q, decides to use the work of auditor of component i.e. entity P, in relation to audit
of consolidated financial statements. In doing so, he should comply with requirements of:
(a) SA 600, “Using the work of Another Auditor”.
(b) SA 299, “Joint Audit of Financial statements”.
(c) SA 720, “The Auditor’s Responsibilities Relating to Other Information”.
(d) SRS 4410, “Compilation Engagements”
15 If the prior period financial statements were not audited, the auditor shall state the same in.
(a) Key audit matter section.
(b) Emphasis of matter paragraph.
(c) Going concern paragraph.
(d) Other matter paragraph.
16 In case of audits of listed entities, other information section is required in auditor’s report when at
the date of auditor’s report:
(a) Auditor has obtained some or all of the other information.
(b) Auditor has obtained all of the other information.
(c) Auditor has obtained or expects to obtain the other information.
(d) Auditor has obtained some of the other information.
17 In case of audits of unlisted corporate entities, other information section is required in auditor’s
report when at the date of auditor’s report:
(a) Auditor has obtained some or all of the other information.
(b) Auditor has obtained all of the other information.
(c) Auditor has obtained or expects to obtain the other information.
(d) Auditor has obtained some of the other information. [MTP-April 23]
18 Ram & Associates, a firm of Chartered Accountants, have been operating for the last 10 years having
its office in Delhi with staff of around 30 persons with 4 Partners.
The firm has been offering statutory audit, risk advisory and tax services to its various clients. The
major work of the firm is for taxation services. The audit partners also discussed that the firm needs

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Part I – Multiple Choice Questions
to work significantly to improve the quality of the services they offer and that would also help the
firm to grown its business. Considering this objective, the firm started training programmes for the
staff which were made mandatory to be attended.
During one of the training programmes on quality, a topic was discussed regarding the information
that should be obtained by the firm 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. It was explained that the following points may assist the engagement partner
in determining whether the conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements are appropriate (as per SA 220):
(ii) The integrity of the principal owners, key management and those charged with governance of
the entity;
(iii) The qualification of all the employees of the entity;
(iv) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;
(v) The remuneration offered by the entity to its various consultants;
(vi) Whether the firm and the engagement team can comply with relevant ethical requirements; and
(vii) Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.
Which of the above-mentioned points are relevant for the topic under discussion?
(a) (i), (ii), (iv) and (v)
(b) (ii), (iv), (v) and (vi)
(c) (iii), (iv), (v) and (vi)
(d) (i), (iii), (v) and (vi) [RTP-Nov.19]
19 An auditor’s expert may be either an auditor’s internal or an external expert. Which of the following
cannot be an auditor’s internal expert?
(a) Partner of the Auditor’s Firm.
(b) Temporary Staff of the Auditor’s Firm.
(c) Permanent Staff of Auditor’s Network Firm.
(d) A Prospective CA, soon to join the Auditor’s Firm as a Partner. [MTP-Oct. 19]
20 While conducting the current year audit of Finolex Ltd, the auditor obtains audit evidence that a
material misstatement exists in the prior period financial statements. This misstatement was related
to recognition of research and development expenditure. The provisions of Ind AS 38 Intangible
Assets relating to capitalisation of development expenditure was not applied properly. On this,
unmodified opinion had been previously issued. The current auditor verified that the misstatement
had not been dealt with as required under Ind AS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. Accordingly, the current auditor will:
(a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
statements modified with respect to the corresponding figures included therein.
(b) Express an unmodified opinion in the auditor’s report on the current period financial statements since
it was related to the prior year.
(c) Express a qualified opinion in the auditor’s report on the current period financial statements, modified
with respect to the corresponding figures included therein.
(d) Express an adverse opinion in the auditor’s report on the current period financial statements, modified
with respect to the corresponding figures included therein. [MTP-Oct. 19, April 23]

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21 A significant deficiency exists in the process of flow of approval of travel reimbursements of the
officials. This was communicated in the previous year to those charged with Governance and no
remedial action was taken on the same so far. The auditors are of the opinion that it need not be
communicated again. Is the opinion of the auditors on not to communicate the deficiency in internal
control reported in the previous year correct?
(a) Yes, the auditor is not required to communicate the same again as it is the duty of the management and
those charged with governance to maintain the internal control system.
(b) No, the current year’s communication may repeat the description from previous communication or
simply reference the previous communication.
(c) Yes, the auditor is not required to communicate the same again as written representation is being
obtained from management and those charged with governance that they are responsible for
maintaining internal control.
(d) No, it needs to be communicated again but an oral reminder to those charged with governance on the
matter may suffice. [MTP-May 20]
22 SKJ Private Ltd. is engaged in the business of construction. The company has also got some real estate
projects few years back on which it started the work in the last 2 years. The annual turnover of the
company is INR 600 crores and profits of INR 40 crores.
The statutory auditors of the company got rotated by another audit firm due to mandatory audit
rotation requirements as per the Companies Act, 2013.
The new statutory auditors of the company started audit of the financial statements for the year
ended 31 March 2023 in May 2023. The audit team also requested the client to provide certain
information on the opening balances to perform their audit procedures. Initially the management
did not provide any information to the auditors on the opening balances thinking that this is not
within the scope of their work, however, after going through the auditing standards, the
management agreed and provided the required information.
Later on, the audit team also started requesting information for the period from 1 April 2023 to
31 May 2023. With this requirement, CFO of the company got very upset and angry and set up a
meeting with the senior members of the audit team. CFO raised a concern that the audit team has not
been doing the work properly and has been asking for unnecessary information like information on
opening balances and then the information for the period after 31 March 2023. The audit partner
explained to the CFO that everything requested by the audit team has been as per the auditing
standards, however, CFO said that in the earlier years, the previous auditors never asked for such
information.
You are requested to give your view in respect of this matter.
(a) The requirement of the auditors for opening balances was valid but for the period after 31 March 2023
is completely wrong as that is out of their scope for the current year’s audit. They can ask for those
details during the audit of next year.
(b) The concern of the CFO was valid. He has seen the previous auditors not performing such audit
procedures and hence the new audit team should also follow the same approach which was followed by
previous auditors as that would lead to efficient in audit.
(c) The requirement of the auditors for opening balances as well as for the period after 31 March 2023 is
valid. After the requirements of SA 510 and SA 560, audit team is required to perform these
procedures.
(d) The audit team should set up a meeting with previous auditors wherein it should be assessed why
different approach was followed by the previous auditors. On the basis of that discussion with the
previous auditors, next course of action should be decided. [MTP-May 20]

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Part I – Multiple Choice Questions
23 Which among the following is not a factor for determining the necessity to use an auditor’s expert to
assist in obtaining sufficient appropriate audit evidence?
(a) The use of a management’s expert by the management in preparing the financial statements.
(b) The presence of an internal audit function and verification of the subject matter by them.
(c) The nature and significance of matter including its complexity.
(d) The risk of material misstatement in the matter. [MTP-May 20]
24 Ram & Shyam Co LLP is an old firm of Chartered Accountants with Ram and Shyam as the audit
partners. The firm has various statutory audit and internal audit engagements which are looked
after by Ram and Shyam respectively. In the previous year ended 31 March 2023, one of the audit
engagements of the firm was picked up for peer review and peer reviewer raised various
observations regarding the audit documentation. Some of the information regarding audits were
missing from the audit files as per the observation of the peer reviewer.
Ram & Shyam are in the process of establishing a robust mechanism for audit documentation so that
the same is available for a long duration and would lead to audit efficiencies also in the future years.
Ram and Shyam would like to understand the period for which audit documentation should be
maintained by them as per the Standard on Auditing 230. Please advise.
(a) 10 years.
(b) 9 years.
(c) 8 years.
(d) 7 years. [RTP-May 19, MTP-March 23]
25 M/s Ram Raj & Associates have been appointed as statutory auditors of Venus Ltd. for the FY 2022-
23. During the year, the company has entered into some related party transactions. CA Ram, the
engagement partner has taken a management representation letter regarding the proper accounting,
presentation and disclosure of such related party transactions. Is there any further responsibility of
CA Ram with respect to the other procedures to be performed for related party transactions?
(a) No, there is no further responsibility of CA Ram as the best audit evidence for the related party
transaction is the management representation letter.
(b) No, there is no further responsibility of CA Ram as the audit firm is responsible for verifying the
balances and disclosure of related party transactions. The identification of related party transactions is
the responsibility of the management of Venus Ltd.
(c) Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and
respond to the risk of material misstatement arising from the entity’s failure to appropriately account
for related party relationships, transactions and balances, and obtaining merely management
representation letter can be considered to be sufficient appropriate audit evidence.
(d) Yes, the auditor has the responsibility to detect fraud and error with respect to the related party
transactions. [MTP-Oct. 20]
26 Before concluding the audit, there was a difference of opinion between the audit committee and the
auditors as to which among the following are the areas which the auditor should take into account to
determine “Key Audit Matter” as per SA 701:
(I) The effect on audit of significant transactions that took place in the FY.
(II) Areas of high risk as assessed and reported by management’s expert.
(III) Significant auditor judgment relating to areas in the financials that involved significant
management judgment.
As per SA 701- Communicating Key audit matters in the Independent auditor’s Report, which among
the above-mentioned areas should CA & Co. take into account to determine “Key Audit Matter”?

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(a) (I) & (III)
(b) (II) only
(c) (I) & (II)
(d) (I), (II) & (III) [RTP-Nov. 20]
27 CA Ram identified that there was a misstatement last year and the same is still not corrected.
Although unmodified audit report was issued last year by CA Ram. Guide CA Ram on the audit
opinion considering the fact that the last year’s misstatement has been identified in the current year
and unmodified opinion was issued in the last year?
(a) In accordance with SA 710, CA Ram should give unmodified opinion, but include other matters
paragraph in the audit report as last year’s profit is being reflected in reserve and surplus.
(b) In accordance with SA 710, CA Ram should seek legal opinion.
(c) In accordance with SA 710, CA Ram should qualify current period audit report with respect to
corresponding figures only.
(d) In accordance with SA 710, CA Ram should give unmodified opinion, but last period’s modified opinion
should be highlighted in Emphasis of matter paragraph. [MTP-March 21]
28 While auditing Veer Ltd., CA. Vardhman divided the whole population of trade receivables balances
to be tested in a few separate groups called ‘strata’ and started taking a sample from each of them. He
treated each stratum as if it was a separate population. He divided the trade receivables balances of
Veer Ltd. for the Financial Year 2022-23 into groups on the basis of personal judgment as follows:
S. No. Particulars
1 Balances in excess of ₹ 10,00,000;
2 Balances in the range of ₹ 7,75,001 to ₹ 10,00,000;
3 Balances in the range of ₹ 5,50,001 to ₹ 7,75,000;
4 Balances in the range of ₹ 2,25,001 to ₹ 5,50,000;
5 Balances ₹ 2,25,000 and below
From the abovementioned groups, CA. Vardhman picked up different percentage of items for
examination from each of the groups, for example, from the top group i.e. balances in excess of
₹ 10,00,000, he selected all the items to be examined; from the second group, he opted for 25 % of
the items to be examined; from the lowest group, he selected 2% of the items for examination; and so
on from rest of the groups. Which one of the following methods of sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling. [MTP-Oct. 21]
29 Factors that the auditor may consider in determining the appropriate level of detail for
communication of significant deficiencies under SA 265 depends upon:
I. Nature, size and complexity of the entity
II. Nature of the significant deficiencies identified
III. Estimated time required by management to resolve the deficiency
IV. Fees charged from the client

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(a) I and II.
(b) I, II and III.
(c) III and IV.
(d) Only II. [MTP-Oct. 21]
30 As per SA 550 on Related Parties, existence of which relationship indicate the presence of control or
significant influence?
(a) Friend of a family member of a person who has the authority and responsibility for planning.
(b) Holding debentures in the entity.
(c) The entity’s holding of debentures in other entities.
(d) The entity’s holding of equity in other entities. [MTP-Oct. 21]
31 Ms Kee, the engagement partner of Best Hospitality Limited’s audit team did not perform the
necessary communication with those charged with governance over some critical issues identified
during the course of the audit. Moreover, when management identified that the engagement partner
has not communicated to those charged with governance of the Best Hospitality Limited, they also
chose not to communicate.
Upon identification of this issue, the personnel charged with governance inquired with management
and auditors as to why there was no communication of the critical matters to them. Upon such
inquiry, Engagement Partner contended that it was the responsibility of Management to
communicate first, then only the audit team should communicate. However, Management was of the
view that they are not liable to communicate to those charged with governance. As an Engagement
Quality Control Reviewer, what will be your opinion?
(a) The auditor is responsible for communicating matters required by SA 260 to those charged with
governance. Also, management has a responsibility to communicate matters of governance interest to
those charged with governance. Communication by the auditor does not relieve management of its
responsibility.
(b) SAs are not applicable to the management and hence the management was not responsible for
communicating the same to those charged with governance. Also, as per SA 260, Auditor can only
communicate when management has already informed those charged with governance about the
matters. Auditors cannot communicate first without management’s communication.
(c) Communication by management with those charged with governance of matters that the auditor is
required to communicate does relieve the auditor of the responsibility to also communicate them if the
management has already communicated. Hence, in the current case Management should have
communicated as it was their responsibility.
(d) SA 260 requires the auditor to perform procedures specifically to identify any other matters to
communicate with those charged with governance which includes matters already communicated by
the management of non-material nature. Hence, it was the responsibility of the Auditor to
communicate. [MTP-Nov. 21]
32 XYZ & Associate Chartered Accountants were appointed auditors for Weknow LLP. The engagement
manager of the audit team, while designing the auditor response to assessed risk, concluded that
there are no requirements of the applicable financial reporting framework for disclosing the related
party transaction in the Firm’s Financial Statement and hence the audit team is not required to
perform any audit procedures with respect to identification and disclosure of related party
relationship and transaction in financial statement. You as an engagement partner guide the
engagement manager by selecting the appropriate response from below:

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Part I – Multiple Choice Questions
(a) Even if the applicable financial reporting framework establishes minimal or no related party
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party
relationships and transactions and should sufficiently be able to conclude whether the financial
statements, insofar as they are affected by those relationships and transactions achieve a true and fair
presentation and are not misleading.
(b) If the applicable financial reporting framework establishes minimal or no related party requirements,
then the auditor is not required to obtain an understanding of the entity’s related party relationships
and transactions.
(c) Even if the applicable financial reporting framework establishes minimal or no related party
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party
relationships and transactions and should sufficiently be able to conclude whether the financial
statements, as a whole, are free from all the material related party transactions.
(d) Because related parties are not independent of each other, hence auditor can obtain the written
representation from the Related Party’s auditor regarding the accuracy and completeness of the related
party transactions disclosed in Firm’s Financial Statement. This should only be carried where the
applicable financial reporting framework establishes minimal or no related party requirements.
[MTP-Nov. 21]
33 Description of each key audit matter in the “key audit matters section” needs to cover except
following aspects:
(a) Reference to related disclosures, if any, in the financial statements.
(b) Explanation on the matter given by management.
(c) How the matter was addressed in the audit.
(d) Why the matter was considered to be one of most significance in the audit and therefore determined to
be a key audit matter. [MTP-Nov. 21]
34 Which of the following is not an indicator about material uncertainty over the entity’s ability to
continue as a going concern:
(a) Net liability or net current liability position.
(b) Cancellation of company’s production license due to change on government policies.
(c) Non-declaration of dividend to equity shareholders.
(d) Substantial operating losses or significant deterioration in the value of assets used to generate cash
flows. [MTP-Mar. 22]
35 ………….. approach to sampling has the following characteristics:
I. Random selection of the sample items; and
II. The use of probability theory to evaluate sample results, including measurement of sampling
risk.
(a) Statistical sampling
(b) Non-statistical sampling
(c) Stratified sampling
(d) Haphazard sampling [MTP-Mar. 22]
36 Shripal Company got a show cause notice from State Pollution Control Board for the contravention of
the provisions of Hazardous and waste Management Rule. As per SA 250, the auditor shall perform
the audit procedures to help identify instances of non-compliance with other laws and regulations
that may have a material effect on the financial statements. As the audit team of the company became
aware of information concerning an instance of non-compliance with law, what would NOT be the
audit procedure to be performed?

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(a) Understand the nature of the act and circumstances in which it has occurred and obtain further
information to evaluate the possible effect on the financial statement.
(b) Discuss the matter with management and if they do not provide sufficient information; and if the effect
of non-compliance seems to be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating
procedures are designed to assist in the prevention of non-compliance with law and regulation and
report accordingly.
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including risk
assessment and reliability of written representation and take appropriate action. [MTP-Apr. 22]
37 The amount of materiality initially determined needs to be revised as the audit progresses:
(a) If there is a delay in the audit.
(b) In the event of becoming aware of information during the audit that would have caused the auditor to
have determined a different amount (or amounts) initially.
(c) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a higher amount (or amounts) initially.
(d) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a lower amount (or amounts) initially. [MTP-Apr. 22]
38 As per SA 701- Communicating Key audit matters in the Independent auditor’s Report, which among
the following areas should CA & Co. take into account to determine “Key Audit Matter”?
(i) The effect on audit of significant transactions that took place in the financial year.
(ii) Areas of high risk as assessed and reported by management’s expert.
(iii) Significant auditor judgment relating to areas in the financials that involved significant
management judgment.
(a) (i) & (ii)
(b) (ii) only
(c) (i) & (iii)
(d) (i), (ii) & (iii) [MTP-Apr. 22]
39 Match the following terms to their definitions:
(i) Accounting Estimates 1 The susceptibility of an accounting estimate and
related disclosures to an inherent lack of precision
in its measurement.
(ii) Estimation uncertainty 2 A lack of neutrality by management in the
preparation and presentation of information.
(iii Management bias 3 An approximation of a monetary amount in the
absence of a precise means of measurement.
(iv) Measurement objective for fair 4 To forecast the outcome of one or more
value Accounting Estimates transactions, events or conditions.
(a) (i)-3, (ii)-1, (iii)- 2, (iv)- 4.
(b) (i)-2, (ii)-1, (iii)- 1, (iv)- 4.
(c) (i)-1, (ii)-3, (iii)- 2, (iv)- 4.
(d) (i)-4, (ii)-1, (iii)- 2, (iv)- 1. [RTP-May 22]

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Part I – Multiple Choice Questions
40 ADI Ltd. is engaged in the business of providing management consultancy services and have been in
operation for the last 15 years. The company’s financial reporting process is very good and its
statutory auditors always issued clean report on the audit of the financial statements of the
company. The auditors were required to be rotated due to mandatory audit rotation requirement of
the Companies Act, 2013.
RNJ & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the company
for a term of 5 years and have to start their first audit for the financial year ended 31 March 2023.
The auditors had a detailed and clear discussion with the management that they will perform their
audit procedures in respect of opening balances along with the audit procedures for the financial
year ended 31 March 2023.
Management agreed with that and the audit was completed as per the plan.
The auditors did not have any significant observations and hence they communicated to the
management that their report will be clean. Management was quite happy with this and also
requested the auditors to share draft report before issuing the final report.
In the draft audit report, all the particulars were fine except ‘other matters paragraph’ wherein the
auditors gave a reference that the financial statements for the comparative year ended 31 March
2022 was audited by another auditor. Management asked the audit team to remove this paragraph as
the auditors had performed all the audit procedures on opening balances also. But the auditors did
not agree with the management.
Please advise the auditor or the management whoever is incorrect with the right guidance.
(a) The contention of the management is valid. After performing all the audit procedures, an auditor
should not pass on the responsibility to another auditor by including such references in his audit
report.
(b) Any auditor has two options, either to perform audit procedures on opening balances or given such
reference of another auditor in his report. An auditor cannot mix up the things like this auditor has
done. It is completely unprofessional.
(c) In the given situation even if the auditor wants to give such reference, the management and the auditor
should have taken approval from the previous auditor at the time of appointment of new auditor. In
this case, it cannot be done.
(d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor is
required to include such reference in his report as per the requirements of the auditing standard.
[MTP-Sep. 22]
41 A small concern has approached CA. Ajeet Nath for audit of accounts for year 2022-23. It later on
transpired that preparation of accounts of the concern was outsourced to a third party which was
engaged in preparation of books of this concern on a cloud server and was also preparing financial
statements. The discussion amongst partners regarding agreeing to audit engagement remained
inconclusive. Which of the following statements is MOST APPROPRIATE regarding agreeing to audit
engagement of small concern?
(a) The management is responsible for preparation of books and financial statements. If management is
not willing to acknowledge it, audit engagement should not be accepted.
(b) The third party has prepared the books and financial statements. It should be acknowledged by third
party and then audit engagement should be accepted.
(c) It is implied that management is responsible for preparation of books and financial statements. No
express acknowledgment from management is necessary. Hence, audit engagement should be accepted.
(d) The management as well as third party should acknowledge joint responsibility for preparation of
books and financial statements. Only then, audit engagement should be accepted. [MTP-Oct. 22]

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Part I – Multiple Choice Questions
42 The following table shows a summary of identified misstatements:
Profit & Loss Balance Sheet
(₹ in Lakh) (₹ in Lakh)
1. Accumulated depreciation 20
Depreciation 20
Incorrectly calculated depreciation on a straight-line basis
2. Bad debt expense 45
Allowance for doubtful debt 45
Identified risk over bad debts based on ageing profile of the trade receivables balance
Overall materiality for this audit was calculated and agreed to be ₹ 50 lakh. Which of the following
scenarios would be the best approach to be taken by the audit team and most likely outcome?
(a) The audit team does not need to communicate this summary of identified misstatements to
management, as individually the misstatements are not material.
(b) The audit team should ask a member of the accounts team to make journal entries to correct the
misstatements identified immediately, without notifying senior management.
(c) The audit senior communicates all the identified misstatements to the appropriate level of
management of the entity on a timely manner. Management does not see that the accumulated
misstatements would lead to the financial statements being materially misstated and therefore, request
them to be uncorrected and noted in the written representation.
(d) The audit senior communicates all the identified misstatements to the appropriate level of
management of the entity on a timely manner. Then management can assess the findings and confirm
they are in agreement. Assuming management agrees, they will be requested to make the necessary
corrections. [MTP-Oct. 22]

Chapter – 2: Audit Planning, Strategy and Execution

43 AK & Co, a firm of Chartered Accountants, have been operating for the last 6 years. Due to the quality
of service offered by the firm, it has made its name and is quite renowned especially in Southern
India where its head office is located. The firm has a staff size of 240 including graduates, Chartered
Accountants, Management Consultants, Company Secretaries and lawyers.
The firm has 3 branches other than head office at Bangalore, Chennai and Pune.
The firm has got many clients for statutory audit over the period and ensures that to maintain the
quality of work, proper planning is done by each team before starting any engagement.
One of the engagement team, picked up for statutory audit of Sun Private Ltd, was involved in the
process of planning of audit for the financial year ended 31 March, 2023.
The audit for the financial year ended 31 March, 2022 was conducted by a different engagement
team. However, the engagement team of Sun Private Ltd. for the current year has got the industry
experience.
The audit team is confused during the planning work and would like to have your views on following
points. Please advise by answering one of them.

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Part I – Multiple Choice Questions
(a) The engagement team should consult the previous year’s engagement team during the course of their
planning.
(b) The engagement team should be independent and hence, cannot consult the previous year’s
engagement team during the course of their planning.
(c) The engagement team needs to maintain confidentiality and hence, cannot consult the previous year’s
engagement team during the course of their planning.
(d) Only the Partner who is going to sign the audit report may consult the previous year’s audit team.
44 RJ Private Limited having its office at Bangalore and operations spread across Southern India, had a
discussion with its statutory auditors regarding the audit plan and the timelines.
In the past years, there have been significant delays in completion of audit work and the
management wanted that for the current year, audit should get completed on time. For doing this,
the audit team suggested that the information for the purpose of audit should be ready on time and
only then the timelines as agreed can be achieved.
On the basis of the discussions with the client & the auditors and internal discussions amongst the
audit team members, a detailed audit programme was prepared by the audit team for the current
year’s audit. But the audit team discussed that they will not document this audit programme till the
completion of the audit work because at various stages, the work may require changes. If the audit
team documents the audit programme then it would create problems later on at the time of
assembling of the audit file wherein the audit team would have to show the changes made by them in
the audit programme during the course of the audit.
You are required to share your views in respect of this understanding and approach of the auditor.
(a) The decision of audit team regarding not documenting the audit programme is very good as this would
avoid unnecessary problems of documentation of changes made in the audit programme at the time of
assembly of file.
(b) Instead of considering the audit programme, the audit team could have prepared a checklist. In case of
a checklist, such problem will not arise. Because in case of a checklist if any changes are made then the
final checklist can be kept in the file along with old working checklist used during the audit.
(c) The approach of the audit team not to document audit programme is not correct. The audit team needs
to document it properly at the time of planning stage itself and any changes made after that should also
be documented with explanations.
(d) The decision of audit team not to document the audit programme is not correct. Their concern that the
changes may arise in the audit programme is valid, however, to take care of that, the audit team can
take approval from the ICAI later on when those changes will be made. The audit team will have to
document the changes and the approval note of the ICAI.
45 AJ Private Ltd. is in the business of construction and infrastructure having an annual turnover of INR
1,100 crore. The operations of the company are run efficiently driven by the well laid out policies
and procedures. The processes of the company are very strong and are well documented and
properly communicated to its employees, as required.
The management had also done a detailed risk assessment in the earlier years and currently the risk
management system of the company is considered to be very effective. The internal controls include
both automated and manual.
During the course of the audit of the financial statements of the company for the financial year ended
31 March 2023, the statutory auditors did their risk assessment and also reviewed the general IT
controls which were found to be effective.

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Considering the same, one of the senior audit team members asked the team to start performing the
substantive audit procedures taking the approach that controls are effective.
However, the audit team did not find this approach correct and discussed that they should also check
the effectiveness of other manual and automated controls by testing them and then move on to
substantive testing.
The audit team recently had a training on the internal controls and hence their understanding was
different from the audit senior.
This led to a conflicting situation between the audit senior and remaining audit team.
In the given situation, please advise which of the following would be correct.
(a) The audit senior is correct because general IT controls were found to be effective and hence no further
work may be required on controls.
(b) The view of the audit team looks fine because without testing of internal controls covering all types of
controls (manual and automated), those controls cannot be said to be operating effectively.
(c) The audit senior seems reasonable in his approach because general IT controls were found to be
effective. However, it would be more appropriate to also test application controls before concluding on
the effectiveness of the controls.
(d) The argument of the audit team looks better because every audit requires significant time to be spent
on testing of internal controls and by only covering general IT controls, it would be difficult to justify
this requirement later on in the audit file.
46 CA Sameer, after developing the audit strategy for Menka Ltd., develops an audit plan but finds a
need to revise the materiality levels set earlier and therefore, a deviation from the already set audit
strategy is felt necessary. In this case, he should.
(a) Continue with the Audit Plan without considering the Audit Strategy.
(b) Drop the audit and withdraw from the engagement.
(c) First modify the audit strategy and thereafter, prepare the audit plan according to the modified strategy.
(d) Devise a new audit plan and then, change the strategy as per the Revised Plan. [MTP-Oct.19]
47 Gamma Private Ltd. duly appoints CA Palak as the tax auditors of their Company and the appointed
tax auditor chalks out a detailed Audit Programme to be assigned to her audit engagement team to
carry out the tax audit efficiently & effectively. Which of the following situations wouldn’t warrant an
alteration in the Audit Programme during the course of Audit by the Tax Auditor of Gamma Private
Limited during the next Financial Year?
(a) Significant changes in procedures and personnel of the company subsequent to audit Procedures.
(b) A Substantial increase in the volume of turnover as against the anticipated results of the Company.
(c) An extraordinary increase in the amount of book debts as compared to that in the first year.
(d) A new contract received by Gamma Ltd. form a foreign client during the course of the audit.
[MTP-April 22]

Chapter – 3: Risk Assessment and Internal Control

48 Raj Private Limited is engaged in the business of retail and has its retail outlets concentrated
towards Northern India. Currently, the company has 59 outlets and the plan of the management is to
take this to at least 100 over the next 2 years.
The company is audited by Raj & Associates, a firm of Chartered Accountants, who have been
operating for over 20 years, however, they don’t have much experience in the retail sector. Because

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Part I – Multiple Choice Questions
of this fact the audit team decided to plan efficiently for the audit of the financial statements of the
company for the year ended 31 March 2023, being their first year of audit.
During the course of risk assessment by the auditors, it was discussed that the company is operating
in an industry where the operations are not very complicated and mostly the processes are known to
all. Considering the same they decided that assessment of inherent risk should not be done for this
company as that would be inefficient. However, the auditors will take due care of the control risks.
The same assessment was deliberated upon and after lot of discussions it was finalized like this.
In the given situation, please advise which one of the following would be correct.
(a) The assessment of audit team is correct.
(b) The assessment of audit team is wrong considering the fact that this is a private company wherein such
assessment is not possible.
(c) The assessment of audit team is wrong for this company.
(d) The assessment of audit team is correct considering the fact that this has been thoroughly discussed.
49 Kshitij Private Ltd. is a company based out of Noida having operations in India and Dubai. The
company’s operations in Dubai have increase over the last 2 years and the management is earning
very good profits.
Because of the profits, the management also planned that they should now focus on strengthening of
internal controls of the company and for that purpose they have discussed with the statutory
auditors to carry out the audit for the financial year ended 31 March 2023 very rigorously.
The report on internal financial controls is also applicable to the company and hence the auditors
during the course of their work asked for Risk-control matrices from the company. During the year
ended 31 March 2022, Risk-control matrix was not available with the company and was prepared in
a draft manner and the same was shared with the audit team during that year and the auditors
completed their work on the basis of that.
However, for the year ended 31 March 2023, the auditors would like to have robust documentation
and are not ready to accept the same Risk-control matrices.
In the given situation, please suggest what should be the course of action.
(a) The request of audit team is correct and the management should provide that.
(b) The requirement of audit team is not justified considering the fact that last year same documentation
was used by them.
(c) The requirement of audit team is not justified considering the fact that it’s a private company and
auditor anyways is required to perform rigorous audit procedures.
(d) In case of a private company on which internal financial controls report is required, the auditor is not
allowed to take any Risk- control matrix from the management. Seems to be an ethical issue.
50 SK Private Limited is a medium-sized company having operations in Jharkhand. The company
manufactures some parts and sells that to various dealers on ex-works basis. The financial
statements of the company are prepared as per Ind AS and internal financial controls report is also
applicable on the same.
During the course of audit of the financial statements for the year ended 31 March 2023, the
management of the company had a detailed discussion with the auditors for audit planning.
Further it was also decided that any observations of the auditors should also be discussed with the
management before conclusion by the audit team which was not done in the past years.
Considering this, the auditors started the risk assessment and requested the management to share
their documentation for the same on which the management said that they don’t have any risks and
if the auditors come across any such thing they can discuss that with the management.

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Part I – Multiple Choice Questions
But the auditors were not convinced with the view of the management and the same thing has
happened in the past years as well. You are required to provide your inputs to resolve this matter.
(a) The requirement of the audit team is not correct.
(b) The view of the management is correct because of the applicability of Ind AS.
(c) The view of the management is correct because of the applicability of internal financial controls
reporting.
(d) The view of the management is not correct.
51 RIM Private Ltd is engaged in the business of manufacturing of water bottles and is experiencing
significant increase in turnover year on year. It is a subsidiary of RIM Gmbh, based out of Germany.
During the financial year ended 31 March 2023, the company carried out a detailed physical
verification of its inventory and property, plant and equipment.
During the year, various other activities were carried out to increase efficiency in operations and
reductions of costs.
The statutory auditors of the company started their audit work from April 2023 and requested for a
documentation on changes in processes and activities during the year as well as any resultant impact
of the same on management controls.
The management of the company told the auditors that all such documentation is maintained by the
parent company as this is a closely held private company and even though internal financial controls
reporting is applicable on this company, the parent company is taking due care of each and every
process.
The auditors did not agree with the views of the management. Please advise both the management
and the auditors.
(a) The auditors should look for documentation as per Sarbanes Oxley in this case.
(b) The auditors are correct in this case and the management should provide the required documentation.
(c) The auditors are correct in this case and the management should provide the required documentation.
However, in case the parent company is covered by Sarbanes Oxley then it can be ignored by the
auditors.
(d) The management is correct.
52 XYZ Private Limited is engaged in trading of parts of machineries used in boiler plants. Company has
seen growth of 60% in the sales and management expecting similar growth in next 3 financial years
and is planning to onboard new dealers in order to achieve management goal. Purchase department
also expect to develop new suppliers in order to meet customer demands.
Internal auditor of the company has identified frequent changes in the bank account and other
master details of suppliers. At this expansion planning phase, company has no defined control to
provide assurance on said supplier master changes. Management agreed to develop the process of
monthly detailed review of supplier master changes done in supplier master by Finance assistant in
order to ensure authorized changes in supplier master.
One of the members from the Management would like to know that above controls falls under which
category:
(a) Automated control.
(b) Preventive control.
(c) Detective control.
(d) Compensating control.

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Part I – Multiple Choice Questions
53 The management of Magoo Ltd. has developed a strong internal control in its accounting system in
such a way that the work of one person is reviewed by another. Since no individual employee is
allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds
and errors are high. CA. Olive has been appointed as an auditor of the company for current Financial
Year 2022-23. Before starting the audit, she wants to evaluate the internal control system of Magoo
Ltd. To facilitate the accumulation of the information necessary for the proper review and evaluation
of internal controls, CA. Olive decided to use internal control questionnaire to know and assimilate
the system and evaluate the same. Which of the following questions need not be framed under
internal control questionnaire relating to purchases?
(a) Are authorized signatories for purchases limited to elected officials?
(b) Are payments approved only on original invoices?
(c) Does authorized officials thoroughly review the documents before signing cheques?
(d) Are monthly bank reconciliations implemented for each and every bank accounts of the company?
[MTP-Sep. 23]
54 Adequate design and effective implementation of Internal Controls may not lead to the identification
of:
(a) Frauds and errors.
(b) Design and Implementation gaps in Processes.
(c) Abuse by Process Owners.
(d) Segregation of Duties.
55 The acceptable detection risk needs to be ______ in order to reduce the audit risk to ______ in the area of
inventories management and handling.
(a) low in order to reduce audit risk to an acceptably high level.
(b) high in order to reduce audit risk to an acceptably high level.
(c) low in order to reduce audit risk to an acceptably low level.
(d) high in order to reduce audit risk to an acceptably low level. [MTP-March 21]

Chapter – 4: Audit in an Automated Environment

56 KPL Private Limited is a large software company based out of Hyderabad. The annual turnover of the
company is INR 2,100 crore. The company sells software and is also involved in the implementation
of those software for its clients.
The major chunk of the revenue though comes from sale of software only. The company works on a
completely paper-less office and accordingly, most of the documents are available in soft copy.
During the financial year ended 31 March 2023, the auditors during the course of their audit
obtained various audit evidences some of which were in hard copy but mostly in soft copy.
On conclusion of the audit, the auditors are in a dilemma whether to maintain their documentation
entirely in hard copy or soft copy or can it be mixed of both.
After consultations with various persons, the auditors stood that the documentation for this
company, being operated in fully automated environment should be in soft copy only.
Please advise whether this understanding is correct.

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Part I – Multiple Choice Questions
(a) This is a matter of documentation of audit evidence for a client working in fully automated
environment and hence it should be in soft copy only.
(b) As per the requirements of auditing standards, this documentation can be in a mix of both soft and hard
copy.
(c) Since the client is operating in a fully automated environment, it would be important to check with
them because all this documentation has come from the client only.
(d) As per the requirements of auditing standards, documentation is not required in case of a client
working in automated environment because everything is automated and can be accessed easily at any
point of time.
57 AR Private Limited is a medium-sized company engaged in the business of trading of electronic
equipment. The company has various warehouses where all of these equipment are kept and has an
inventory levels of generally 2-3 months.
The internal environment of the company is driven by various processes some of them are manual
and some automated. Accordingly, the management has also set up various controls both manual and
automated and is comfortable with their design and operating effectiveness.
During the course of audit of the financial statements for the year ended 31 March 2023, the auditors
raised various queries regarding various processes where the controls were operating effectively.
This was because of the fact that auditor was considering either only manual controls or only
automated controls in a process.
As per the auditor, the management should have adopted the same approach and hence they would
like to increase the substantive audit procedures because they had a view that as per the current
approach of the management, controls should be considered as ineffective irrespective of the fact
that the testing which the audit team had performed resulted in the controls being effective.
Currently, the concern was regarding the approach on which management was also stuck on their
point. You are required to provide your inputs to resolve this matter.
(a) The approach of the management doesn’t seem to be correct because of the nature of the operations of
the company. The current approach which the management has followed can be accepted only in case
of manufacturing industry.
(b) The management should have discussed their approach with the auditors before appointing them. The
Companies Act, 2013 provide specific guidance on these matters wherein the management of the
company can follow such approach by taking pre-approval from their auditors and in such a case, the
report of the auditors is always clean.
(c) The approach of the management is completely fine. The auditors need to correct their understanding
of the internal controls and the application of internal controls. A process cannot be limited to have
either only manual control or automated control.
(d) Considering the size of the company, such matters should be ignored by the auditors. Even if the
approach of the management is not correct, it would not have any impact on the work of the auditors
because all such matters get resolved at the time when auditors perform final analytical procedures.
58 AJ Private Ltd. is in the business of construction and infrastructure having an annual turnover of INR
1,100 crore. The operations of the company are run efficiently driven by the well laid out policies
and procedures. The processes of the company are very strong and are well documented and
properly communicated to its employees, as required.
The management had also done a detailed risk assessment in the earlier years and currently the risk
management system of the company is considered to be very effective. The internal controls include
both automated and manual.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
During the course of the audit of the financial statements of the company for the financial year ended
31 March 2023, the statutory auditors did their risk assessment and also reviewed the general IT
controls which were found to be effective.
Considering the same, one of the senior audit team members asked the team to start performing the
substantive audit procedures taking the approach that controls are effective.
However, the audit team did not find this approach correct and discussed that they should also check
the effectiveness of other manual and automated controls by testing them and then move on to
substantive testing.
The audit team recently had a training on the internal controls and hence their understanding was
different from the audit senior.
This led to a conflicting situation between the audit senior and remaining audit team.
In the given situation, please advise which of the following would be correct.
(a) The audit senior is correct because general IT controls were found to be effective and hence no further
work may be required on controls.
(b) The view of the audit team looks fine because without testing of internal controls covering all types of
controls (manual and automated), those controls cannot be said to be operating effectively.
(c) The audit senior seems reasonable in his approach because general IT controls were found to be
effective. However, it would be more appropriate to also test application controls before concluding on
the effectiveness of the controls.
(d) The argument of the audit team looks better because every audit requires significant time to be spent
on testing of internal controls and by only covering general IT controls, it would be difficult to justify
this requirement later on in the audit file.
59 RIM Private Ltd. is engaged in the business of manufacturing of cranes and other construction
equipment. The nature of the operations are such that purchases are quite significant even though
the sales may or may not be very significant, in terms of number of transactions during the year.
The company’s statutory auditors have also obtained certain audit tools to help the audit team on
various audit procedures to bring efficiency in various audits.
During the course of the audit of the financial statements for the financial year ended 31 March 2023,
the auditors used those audit tools (also known as computed assisted audit techniques) for sampling
procedures and data analytics.
The outcome of the tools resulted in some analysis and requirements which the audit team
requested from the client. However, the client refused to provide any such information because as
per the client all these tools were those of the auditor and any outcome of the same needs to be
handled by themselves instead of asking the management.
The auditors have suggested that such an attitude of non-cooperation would not help the either party
and would defeat the objective of the audit. The management of the company is, however, ready to
provide any other information to the auditors.
In this situation, please advise both the management and the auditors.
(a) Since the management is ready to provide any other information, the auditor should obtain this
information as well by not disclosing the management that it is outcome of any audit tool.
(b) The view of the management is correct because audit tools are there to support the auditors and not to
lead to increased work for the management.
(c) The auditors are correct because by using audit tools they are performing their audit procedures.
(d) The auditors should ignore all these tools and plan their audit procedures accordingly.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
60 XYZ Private Limited uses ERP software for all business processes. The application is hosted in cloud
and is maintained by a third party. Statutory Auditor is not confident about the risk management
process in the third party organization and requests for audit access to such data centre. The request
was declined and management informed that the third party is ISO certified and audit on controls at
Service Organisation is regularly being conducted. What the auditor should do?
(a) Do not ask for anything else since the Third Party is ISO certified.
(b) Insist on conducting audit in the Third Party.
(c) Take the ISO certificate.
(d) Take the Service Organisation control audit report to review. [MTP-April 23]
61 Which of the following is an example of Direct Entity level control?
(a) Ethics policy
(b) Human resource policy
(c) Business performance reviews
(d) Job roles & responsibilities of employees [RTP-May 19, MTP-March 23]
62 KJ Private Ltd. is engaged in the business of e-commerce wherein most of the operations are
automated. The company has SAP at its ERP package and is planning to upgrade the SAP version.
Currently, the version of SAP being used is fine but the higher version would lead to increased
efficiencies and hence the company is considering this plan which will also involve a huge outlay.
KPP & Associates, were appointed as the statutory auditors of this company for the year ended
31 March 2023 and the statutory audit firm has been working in this industry for long but most of
the work which the firm did was more of risk advisory or internal audit.
For the first time, this audit will be conducted and that’s why the audit team started obtaining
understanding of the operations of the company which included understanding of the SAP system of
the company.
However, the management of the company was not comfortable with this approach of the audit team
particularly because audit team was spending good time on understanding of the IT systems of the
company.
The management suggested that the auditors should limit their understanding and should perform
audit procedures rather than getting into business/ operations.
But the auditors have a different view on this matter and because of which work has got stuck.
In the given situation, please suggest what should be the course of action. [RTP-Nov. 19]
(a) The approach of audit team to obtain detailed understanding of the company before starting with the
audit procedures is absolutely fine. If the auditors don’t understand the systems properly the audit
procedures may not be appropriate.
(b) The management’s concern regarding the approach of the auditors seems reasonable. The auditors are
spending time on understanding of the systems/ business and not performing their audit procedures.
(c) This being a private company and that too into the business of e-commerce, the auditors should have
knowledge about the operations of the company through their understanding of the industry and hence
should not get into this process of obtaining detailed understanding at the client place.
(d) The audit team could have planned their work differently. They should involve IT experts who would
have knowledge of the systems of the company and hence lot of time can be saved. Further in case of
such type of industry, involvement of IT experts is anyways required mandatorily as per the legal
requirements.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
63 ABC Private Limited uses in-house developed application system for Accounting. The auditor
observed that user ID and password is mandatory to access the application system and felt that this
is a good control. What type of control is this?
(a) IT General Control.
(b) Application Control.
(c) Detective Control.
(d) Preventive Control. [MTP-April 21, MTP-Sep. 22, RTP-Nov. 23]
64 KPC Limited is a garment manufacturing company having Head Office in Mumbai, 4 factories, 10
marketing offices across the country. The company uses SAP ERP for almost all its business processes
except Payroll which is being outsourced to an Agency in Bangalore. Once payroll is processed, data
is sent to the HR department at HO. HR department shares such details with Finance Department at
HO for making the payment. Journal entries are recorded in SAP. Employees complained about
incorrect Income Tax calculation and KPC Limited appointed a CA firm to review the payroll system
in detail. It was observed that logic of Income Tax calculation is not as per the requirements of the
Act and when the outsourced Agency confirmed that they carried out program changes recently and
error may be due to such changes. The Auditor attributed the error of such incorrect software
changes to:
(a) Loss of Application Controls.
(b) Loss of Overall Controls.
(c) Loss of IT General Controls.
(d) Human oversight. [MTP-Oct.21]
65 Which of the following is an example of Direct Entity level control:
(a) Company code of conduct and ethics policies.
(b) Human resource policies.
(c) Job roles & responsibilities of employees.
(d) Monitoring of effectiveness of controls activities by Internal Audit function. [MTP-March 22]
66 Chandana Private Limited is engaged in trading of parts of machineries used in boiler plants.
Company has seen growth of 58% in the sales and management expecting similar growth in next 3
financial years and is planning to onboard new dealers in order to achieve management goal.
Purchase department also expects to develop new suppliers in order to meet customer demands.
Internal auditor of the company has identified frequent changes in the bank account and other
master details of suppliers. At this expansion planning phase, company has no defined control to
provide assurance on said supplier master changes. Management agreed to develop the process of
monthly detailed review of supplier master changes done in supplier master by Finance assistant in
order to ensure authorized changes in supplier master.
One of the members from the Management would like to know that above controls falls under which
category:
(a) Automated control.
(b) Preventive control.
(c) Detective control.
(d) Compensating control. [MTP-Oct.22]

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
Chapter – 5: Professional Ethics

67 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 instalments due. However,
both the cheques were returned back by the bank with the remarks "Insufficient funds". As per
Chartered Accountants Act, 1949, under which clause CA D is liable for misconduct?
(a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(b) Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Clause (12) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(d) Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949.
68 CA. Intelligent, a Chartered Accountant in practice, provides part-time tutorship under the coaching
organization of the Institute. On 30th June, 2022, he was awarded ‘Best Faculty of the year’ as
gratitude from the Institute. Later on, CA. Intelligent posted his framed photograph on his website
wherein he was receiving the said award from the Institute. As per Chartered Accountants Act, 1949,
under which clause Intelligent is liable for misconduct?
(a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(b) Clause (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(d) Clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
69 Mr. Hopeful, an aspiring student of ICAI, approached Mr. Witty, a practicing Chartered Accountant,
for the purpose of articleship. Mr. Witty, the principal, offered him stipend at the rate of ₹ 2,000 per
month to be paid every sixth month along with interest at the rate of 10% per annum compounded
monthly to compensate such late payment on the plea that cycle of professional receipts from clients
is six months. Mr. Hopeful agreed for such late payment in the hope of getting extra stipend in the
form of interest. Mr. Witty, however, used to disburse salary to all of his employees on time. As per
Chartered Accountants Act, 1949, under which clause Mr. Witty is liable for misconduct.
(a) Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.
(b) Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Mr. Witty is paying interest thus he is not liable for misconduct.
(d) Clause (10) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
70 AJ & Co LLP is a firm of Chartered Accountants. The firm has 10 Partners. The firm has a good
portfolio of clients for statutory audits, but the same clients had some other firms as their tax
auditors. In the current year (FY 2022-23), many existing clients for whom AJ & Co LLP happens to be
the statutory auditor have requested the firm to carry out their tax audits as well. The firm is
expecting the number of tax audits to increase significantly this year. One of the partners of the firm
has also raised a point that the firm can accepts tax audits up to the maximum limit. However, other
partners are of the strong view that limits on audits is applicable in case of statutory audits and not
for tax audits. This needs to be decided as soon as possible so that the appointment formalities can
also be completed. You are requested to advise the firm in this matter.
(a) There is no limit on number of tax audits in case of LLP.
(b) All the partners of the firm can collectively sign 450 tax audit reports.
(c) All the partners of the firm can collectively sign 600 tax audit reports.
(d) All the partners of the firm can collectively sign 450 tax audit reports. However, one partner can
individually sign maximum 60 tax audit reports. [RTP-May. 19, MTP-March 23]

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
71 CA Ram is practicing in the field of financial management planning for over 12 years. He has gained
expertise in this domain over others. Mr. Ratan, a student of Chartered Accountancy course, is very
much impressed with the knowledge of CA Ram. He approached CA Ram to take guidance on some
topics of financial management subject related to his course. CA Ram, on request, decided to spare
some time and started providing private tutorship to Mr. Ratan along with some other aspirants for 3
days in a week and for 2 hours in a day. However, he forgot to take specific permission for such
private tutorship from the Council. Later on, he came to know that the Council has passed a
Resolution under Regulation 190A granting general permission (for private tutorship, and part-time
tutorship under Coaching organization of the Institute) and specific permission (for part-time or full-
time tutorship under any educational institution other than Coaching organization of the Institute).
Such general and specific permission granted is subject to the condition that the direct teaching
hours devoted to such activities taken together should _______________ in order to be able to undertake
attest functions.
(a) not exceed 25 hours a week.
(b) not exceed 21 hours a week.
(c) not exceed 25 hours a month.
(d) not exceed 21 hours a month. [MTP-Oct. 19]
72 Rajeev Ltd. is a listed company having business of production of motion pictures. For the year ended
31 March 2023, the company wanted to appoint Tax Auditor. For the purpose, somebody who is
familiar with the business of the company/industry was to be preferred for appointment i.e. who
would have worked with the company in the past to avoid efforts/duplication in terms of providing
the information to get the Tax Audit completed. The company had following options for the same.
Select the correct one.
(a) Internal auditors can be appointed for this work.
(b) Both statutory and internal auditors can be jointly appointed for this work.
(c) Internal auditors along with the tax consultants of the company can be appointed for this work.
(d) Statutory auditors can be appointed for this work. [MTP-Oct.19]
73 Nakul Sehdev & Co LLP is a firm of Chartered Accountants. The firm has 12 Partners. The firm has a
good portfolio of clients for statutory audits but the same clients had some other firms as their tax
auditors. In the current year (Financial Year 2022-23), many existing clients for whom Nakul Sehdev
& Co LLP happens to be the statutory auditor have requested the firm to carry out their tax audits as
well. The firm is expecting the number of tax audits to increase significantly this year. One of the
partners of the firm has also raised a point that the firm can accepts tax audits upto a maximum limit.
However, other partners are of the strong view that limits on audits is applicable in case of statutory
audits and not for tax audits. This needs to be decided as soon as possible so that the appointment
formalities can also be completed.
You are requested to advise the firm in this matter.
(a) There is no limit on number of tax audits in case of LLP.
(b) All the partners of the firm can collectively sign 540 tax audit reports.
(c) All the partners of the firm can collectively sign 720 tax audit reports.
(d) All the partners of the firm can collectively sign 540 tax audit reports. However, one partner can
individually sign maximum 60 tax audit reports. [MTP-May 20]

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
74 Letter head of CA. Pankaj, a Practicing Chartered Accountant, is reproduced below:

PANAJ De PANKAJ ACS, LLB, FCA

Chartered Accountant & Member of Parliament
As per Chartered Accountants Act, 1949 you are required to choose the appropriate answer:
(a) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act,1949 he shall not use the
designation ‘Member of the Parliament’ in addition to that of a ‘Chartered Accountant’.
(b) He shall not use the designation ‘LLB’ in addition to that of a ‘Chartered Accountant’ as he has not
enrolled as an Advocate as per clause 7 of Part I of First Schedule to the Chartered Accountants
Act,1949.
(c) He can use designations such as Member of Parliament, Member of the Legislative Assembly in addition
to that of a ‘Chartered Accountant’ as these are specifically allowed as per clause 7 of Part I of First
Schedule to the Chartered Accountants Act,1949.
(d) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act, 1949 he can designate
himself as ‘Chartered Accountant and Company Secretary’ as he is a member of the Institute of
Company Secretaries of India also. [MTP-Oct. 20]
75 CA Dharma has established another branch in the same city. Branch was inaugurated on 3rd October
2022 and on 4th October 2022, friends of CA Dharma gave an article on the front page of local
newspaper congratulating CA Dharma on opening of another branch which also includes half page
photograph of CA Dharma with his consent. In your opinion was the news in newspaper a misconduct
on the part of CA Dharma and what actions can be taken against him?
(a) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be reprimanded, his name
can be removed from the register of members for 3 years and fine upto ₹ 5,00,000.
(b) Yes, it is a misconduct under clause 5 Part I of First Schedule and he can be reprimanded, his name can
be removed from the register of members for 3 months and fine upto ₹ 1,00,000.
(c) Yes, it is a misconduct under clause 7 of Part I of First Schedule and he can be reprimanded, his name
can be removed from the register of members for 3 months and fine upto ₹ 1,00,000.
(d) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be reprimanded, his name
can be removed from the register of members permanently and fine upto ₹ 5,00,000. [MTP-March 21]
76 KB Associates a chartered accountant firm has been appointed as an auditor of the company for the
financial year 2022-23. It consists of two partners CA K & CA B. CA K is brother of the father of the
finance director of the company. CA B is an old friend of the finance director of the company.
What kind of ethical threat is associated with appointment of KB Associates as an auditor of ABC
LTD.?
(a) Self Interest Threat.
(b) Advocacy Threat.
(c) Familiarity Threat.
(d) Self-Review Threat. [MTP-April 21, March 23]
77 Mr. R, (friend of Mr. P) a CA in practice invited Mr. P to set up a ‘Network Firm’ along with 2 more
friends. All the four auditors agreed to the same and decided to start a network firm by the name M/s
RP & Co. However, one of the auditors suggested that they cannot use the term ‘& Co.’ and it needs to
be changed. But Mr. R informed that there is no such Regulation regarding the firm’s name. Which
among the name shall be suitable to the newly started ‘Network Firm’, in accordance with the
provisions of Chartered Accountant Act and Regulation?

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
(a) RP and Co.
(b) RP & Associates.
(c) RP and Networks.
(d) RP & Affiliates. [MTP-April 21, Sep. 23]
78 Mr. Chitragupta Bakutra, a Chartered Accountant is a sole proprietor of Bakutra & Co. which has been
appointed as a statutory auditor of Kraftic Ltd. from F.Y. 2022-23, for a term of 5 years. Mr.
Chitragupta is a director simplicitor of Kalavitur Ltd. which acquired 55% shares of Kraftic Ltd., for
the first time, on 25th May, 2022. Mr. Chitragupta’s term as a director of Kalavitur Ltd. got expired on
31st March, 2023 and he was not re-appointed. Kalavitur Ltd. made a proposal to Mr. Chitragupta for
appointing Bakutra & Co. as its statutory auditor from F.Y. 2022-23, for a term of 5 years, which was
accepted by Mr. Chitragupta. Is there any violation of the Code of Ethics by Mr. Chitragupta Bakutra?
(a) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is an auditor and
also he cannot accept appointment of auditor of a Kalavitur Ltd. without finishing of the cooling period
for the same.
(b) There is no bar in being a director simplicitor of a company, the subsidiary of which the person is an
auditor. However, by accepting appointment as an auditor of Kalavitur Ltd. without finishing of the
cooling period for the same, he has violated the Code of Ethics.
(c) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is an auditor.
However, there is no bar in becoming an auditor of a company of which a person has been its director.
(d) There is no bar in being a director simplicitor of a company, the subsidiary of which the person is an
auditor and also there is no requirement of following the cooling period by a director simplicitor who
on expiry of its term, wants to become auditor of such company. [MTP-Nov. 21]
79 Mr. B one of the partners of the firm is facing a dilemma as to whether the firm BMY LLP should
accept the appointment as Statutory Auditors of M/s Foam Limited wherein Mr. B had sent a
communication in writing addressed to the outgoing auditor Mr. Dalai under certificate of posting
and the outgoing auditor has sent an acknowledgement vide their official email, but this email
address of the outgoing auditor is not registered with the Institute of Chartered Accountants of India.
Mr. B is of the opinion that this is not positive evidence of delivery and violates the provisions of
Code of Ethics if the firm accepts the audit assignment.
With respect to the dilemma being faced by Mr. B, partner of the firm regarding acknowledgment of
the communication from the retiring auditor's vide their official email is not positive evidence of
delivery?
(a) The dilemma of Mr. B is correct as it is not positive evidence of delivery.
(b) The dilemma of Mr. B is not correct as it is positive evidence of delivery as the same is received from
the official email of the outgoing auditor, as per the Code of Ethics.
(c) The dilemma of Mr. B is not correct as statutory auditors are not required to communicate with the
retiring or outgoing auditors in this case.
(d) The dilemma of Mr. B is correct as the email address of the outgoing auditor from which
acknowledgement has come is not registered with the Institute of Chartered Accountants of India.
[RTP-Nov. 22]

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
Chapter – 6: Audit of Limited Companies

80 Section 130 reopening of accounts on Court’s or Tribunal’s orders: of the Companies Act, 2013 states
that a company shall not reopen its books of account and not recast its financial statements, unless
an application in this regard is made by the Central Government, the Income-tax authorities, the
Securities and Exchange Board of India (SEBI), any other statutory regulatory body or authority or
any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to
the effect that Jain Ltd. has an annual turnover of ₹ 350 crore and has been into losses for the last
2 years. The operations of the company are good. Due to some technology changes, the company
started facing competition and hence, started incurring losses. The company plans to revive in the
next 1-2 years with the improvements in its processes. During the year ended 31 March, 2023, the
management of the company came across certain transactions relating to the financial year ended
31 March 2022 which were erroneously missed to be accounted for. This would result into losses and
hence, the management is considering to take this to the right financial year and for that purpose to
reopen its accounts for the financial year ended 31 March 2022. Please advise.
(a) The position of the management is correct.
(b) The action of the management is correct, however, the reason behind reopening the accounts of last
year does not seem to be correct.
(c) The action of the management would have been correct had it been advised by the auditors of the
company and for the same management should have taken approval from SEBI.
(d) The action of the management is not correct. [MTP-April 23]
81 Mr. P, a partner of XYZ Ltd. is a statutory auditor of PQR Ltd since 1st April, 2015. Mr. P also provides
services of tax audit and represents before tax authorities for various litigation matters. PQR Ltd
now wishes to avail internal audit and booking keeping services from Mr. P. Mr. P is required to give
his views for whether he can render such services to PQR Ltd. in addition to existing services. You are
required to choose an appropriate option from the following alternatives:
(a) Mr. P can provide additional services by taking approval from Board of Directors of PQR Ltd.
(b) Mr. P can provide additional services by taking approval from shareholders of PQR Ltd.
(c) Mr. P can provide additional services by informing ICAI and MCA.
(d) Mr. P cannot provide additional services.
82 Gama Ltd. is a renowned limited liability partnership firm specialized in retendering services
relating to statutory audits, tax audits, consultancy relating to direct and indirect taxes etc. Gama Ltd.
is appointed as a statutory auditor for the year ended 31st March, 2023 of Beeta Ltd., a listed
Company. Alfa Ltd, Chartered Accountants were retiring auditors of Beeta Ltd. You are required to
suggest, Gama Ltd. is required to carry out which audit procedures with retiring auditor, Alfa Ltd.
before start of audit:
(a) To obtain no objection certificate from Alfa Ltd. before start of the audit.
(b) To start the audit and then obtain no objection certificate.
(c) No objection certificate is not required to be obtained.
(d) No objection certificate has to be obtained from Beeta Ltd.
83 VBN & Associates, chartered accountants are Statutory auditors of Gold Ltd. for the year ended 31st
March, 2023. While conducting audit for the year, the auditor have come to know that the fraud
amounting to ₹ 2 crore was done by one of the employees. Under Sec. 143(12) of Companies Act,
2013, you are required to suggest whether as a statutory auditor, VBN & Associates is required:

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
(a) To report fraud to Audit Committee/Board of Directors of Gold Ltd. and in Auditor’s Report.
(b) To report fraud to shareholders of Gold Ltd. and no further reporting.
(c) To report fraud only in Auditor’s Report.
(d) To report fraud to Central Government and in Auditor’s Report.
84 AB & Associates is a chartered accountant having two partners Mr. A and Mr. B. The firm was
appointed auditor for 38 companies in the year 2022. Mr. B is also a partner in XYZ & Co. where he
was appointed auditor in 4 companies. On 4th August 2022, Mr. A met with an accident and died. The
firm was reconstituted with Mr. B as the proprietor of new firm and the audits of the new firm
reduced to 16. The new firm, in which Mr. B is the proprietor, accepted the audit of a Private Limited
Company having paid-up capital of ₹ 86 crores on 30th August 2022. XYZ & Co., contended that Mr. B
cannot accept the appointment of Private Limited Company as he has already crossed the ceiling of
20 company audits in that year. Examine validity of claim of XYZ & Co.
(a) Claim of XYZ & Co. is valid as Mr. B has already been appointed auditor for 20 companies i.e. 16 in the
reconstituted firm and 4 in XYZ & Co.
(b) Claim of XYZ & Co. if valid as Mr. Y cannot accept the audit of Private Limited Company in the year in
which there is change in the constitution of firm.
(c) Claim of XYZ & Co. is not valid as Mr. Y can accept the audit as the ceiling of 20 company audits is
applicable for each firm in which the chartered accountant is a partner or proprietor.
(d) Claim of XYZ & Co. is not valid as the ceiling of 20 company audits doesn’t include audit of private
company having paid up capital less than ₹ 100 crores.
85 M/s Garg & Associates were the statutory auditors of ALTO Ltd. for last 2 years. In the current year,
one of the partners Mr. Sunil Garg, a qualified chartered accountant also got qualified as a chartered
management accountant from a foreign accountancy body CIMA. The management of ALTO Ltd. were
glad to hear this and offered Mr. Sunil to handle the management services of the company from this
year. Is he allowed to take up this assignment for ALTO Ltd.
(a) Mr. Sunil is allowed to take up this assignment in his personal capacity as a qualified management
accountant, but not in the capacity of partner of Garg and Associates.
(b) Mr. Sunil can take up the management services and another partner from the firm can cover the
statutory audit of ALTO Ltd.
(c) Mr. Sunil cannot take up the management services as his firm M/S Garg & Associates is the statutory
auditor of ALTO Ltd.
(d) Mr. Sunil is newly qualified management accountant who does not have enough experience, hence
should not take up the management services assignment.
86 M/s Garg & Associates were the statutory auditors of ALTO Ltd. for last 2 years. While carrying out
the audit of financial year 2022-23, auditor is complaining of non-cooperation of the company staff to
provide the relevant information to the auditors. The staff thought that the auditors were a
hindrance in their routine work. The finance director called an urgent meeting to discuss the
removal of the auditor. Within the next week the partner of Garg & Associates was called and
informed that they are no more the auditors of ALTO Ltd.
Comment whether the removal of the auditor was proper in accordance with the Companies Act,
2013.
(a) Removal is not valid as auditor once appointed cannot be removed before expiry of a tenure of five
years.
(b) Removal is not valid as to remove the auditors before the expiry of the term, prior permission from the
Central Government is required.

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(c) Removal is valid as in case of non-government company, board of directors can remove the auditors by
themselves.
(d) Removal is valid provided decision of Board of directors is ratified by the shareholders in general
meeting by Ordinary resolution.
87 RV & Co. Chartered Accountants is an audit firm having two partners CA R and CA V. Firm is already
holding an appointment as auditors of 36 public companies and none of the partners hold any
company audits in their personal capacity or as partners with another firm. RV & Co. has been
offered the appointment as auditors of 12 more private limited companies. Of the 12, one is a
company with a paid up share capital of ₹ 150 crores, nine are “Small Companies” as per the
Companies Act and two are “Dormant Companies”.
Determine the number of companies out of 12 for which RV & Co. can accept the appointment as an
auditor.
(a) 1
(b) 4
(c) 10
(d) 12
88 M/s ABC & Associates, a firm of chartered accountants was appointed as statutory auditors by IRCON
Ltd. for the audit of their financial statements for the financial year 2022-23. During the course of
audit, the auditors noticed a fraud of ₹ 1.36 Crores done by an officer of the company. The officer
sanctioned and made the payment to fake vendors for purchase of fixed assets; however, the assets
were not entered in the Fixed Assets Register. The auditor reported the fraud in his audit report to
the shareholders of the company presented in the AGM, but did not mentioned the name of the
parties involved.
The Board of Directors of the company are complaining against the auditor as he has not complied
with his duty to report fraud as per Sec. 143(12) of the Companies Act, 2013. Advise on the duty of
the auditor as per Companies Act in relation to reporting of the fraud done by officers or employees
of the company?
(a) If the auditor has reason to believe that a fraud has been conducted by the officers or employees of the
company, the auditor shall report the matter to the Central Government immediately.
(b) If the amount of fraud is more than ₹100 lacs; the auditor should have reported the matter within 2
days of his knowledge to the Board of Directors/Audit committee of the company seeking their reply or
observations within 45 days. After completion of 45 days the auditor should forward his report to the
Central Government along with the reply if any received from Board/Audit Committee.
(c) The auditor’s duty is restricted to reporting the fraud to shareholders and he is not required to report
the matter to Board of Directors/Audit Committee/Central Government.
(d) The auditor can submit his report on fraud to shareholders but is required to mention the name of the
parties involved in fraud, as per Section 143(12) of the Companies Act, 2013. [MTP-April-19]
89 ABC Pvt. Ltd. had turnover of ₹ 39 crores as at 31 March 2023. The Company had taken a loan of ₹ 39
crores from various banks and financial institutions during the year ended 31 March 2023. These
loans were paid by the Company before 31 March 2023. The Company is of the view that the auditors’
reporting on adequacy and operating effectiveness of internal financial controls (IFC) u/s 143(3)(i)
of the Companies Act, 2013 would not be required. The auditors of the Company have a different
view. Choose the correct answer?

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(a) The turnover of ABC Pvt. Ltd. is below required threshold and hence reporting on adequacy and
operating effectiveness of IFC will not be applicable.
(b) The turnover of ABC Pvt. Ltd. is below required threshold and loan amount was fully paid before year
end i.e. 31 March 2021. Hence reporting on adequacy and operating effectiveness of IFC will not be
applicable.
(c) The borrowings of the company are above threshold, hence reporting on adequacy and operating
effectiveness of IFC would be applicable.
(d) The turnover of ABC Pvt. Ltd. is below required threshold and loans were repaid before year end i.e. 31
March 2021, applicability of IFC becomes optional. [RTP-May 19, MTP-March 23]
90 AS Ltd. a subsidiary of KEP Ltd. is engaged in the business of manufacturing fertilizers. 15% shares
of KEP Ltd. are held by the Central Government, 25% by Kerala Government and 20% by Karnataka
Government. M/s ABC & Associate, a firm of Chartered Accountants, has been appointed as first
statutory auditor of VAS Ltd. by its Board of Directors. You are required to suggest which of the
following statements would be correct.
(a) The first auditor of VAS Ltd. shall be appointed by the Comptroller and Auditor General of India within
60 days from the date of registration.
(b) The first auditor of VAS Ltd. shall be appointed by the Comptroller and Auditor General of India within
180 days from the date of registration.
(c) The first auditor of VAS Ltd. shall be appointed by members in EGM within 30 days from the date of
registration.
(d) The first auditor of VAS Ltd. shall be appointed by the Board of Directors within 30 days from the date
of registration. [MTP-Oct. 20]
91 NIC Chartered Accountants was appointed as statutory auditors by PNG Ltd. for the audit of their
financial statements. During the course of audit, the auditors noticed a fraud of ₹ 101 lac committed
by an officer of the Company. The officer sanctioned and made the payment to fake vendors for
purchase of fixed assets; however, the assets were not entered in the Fixed Assets Register. The
auditor reported the fraud in his audit report to the shareholders of the Company presented in the
Annual General Meeting, but did not mention the name of the parties involved. The Board of
Directors of the Company asked ICAI to take necessary action against the auditor as he did not
comply with his duty to report fraud as per Section 143(12) of the Companies Act, 2013. What is the
duty of the auditor as per the Companies Act, 2013 in reporting the fraud committed by officers/
employees of the Company?
(a) As per the Companies Act, 2013, since the amount of fraud is more than ₹ 100 lac; the auditor should
have reported the matter within 2 days of his knowledge to the Board of Directors/Audit committee of
the Company seeking their reply or observations within 45 days. After completion of 45 days, the
auditor should forward his report to the Central Government along with the reply, if any, received from
Board/Audit Committee.
(b) As per the Companies Act, 2013, during the course of audit if the auditor has reason to believe that a
fraud has been committed by the officers or employees of the Company, the auditor shall report the
matter to the Central Government immediately.
(c) The auditor’s duty is restricted to reporting the fraud to shareholders and he is not required to report
the matter to the Board of Directors/Audit Committee/Central Government.
(d) The auditor can submit his report on fraud to shareholders but is required to mention the name of the
parties involved in fraud, as per Section 143(12) of the Companies Act, 2013. [RTP-Nov. 20]

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92 AJ Associates a chartered accountant firm is acting as an auditor of the XYZ Ltd. Provisions of the cost
audit are also applicable to the XYZ Ltd. Two years ago, ABC Associates was appointed as cost auditor
of the XYZ Ltd. However, this year due to some reason the Cost Auditor firm resigned. The
management being of the opinion that AJ Associates being the auditor of the company knows
everything about the company so AJ Associates should be appointed as the cost auditor of the XYZ
Ltd. for the current year.
Select the correct statement with respect to the appointment of AJ Associates as the cost auditor of
the Company?
(i) Practicing CA/CWA/CMA can be appointed as cost auditor of the company, so appointment of AJ
Associates as cost auditor being a company auditor is valid.
(ii) Only Practicing CWA/CMA can be appointed as cost auditor of the company, but appointment of
AJ Associates as cost auditor being a company auditor is invalid.
(iii) Company Auditor can be appointed as cost auditor subject to fulfilment of certain conditions as
specified under section 148 of the Companies Act, 2013.
(iv) Company Auditor cannot be appointed as cost auditor of the company.
(a) (i) and (ii).
(b) (ii) and (iv).
(c) (ii) and (iii).
(d) (i) and (iv). [MTP-April 21]
93 Mr. Kartik a practicing Chartered Accountant was engaged in conducting statutory audits, data
privacy assessments and other trade compliance risk assessments for his clients. As a result, he had
good knowledge of the laws and regulations applicable to an entity operating digital space. In 2022,
some of his clients approached him and asked him to share his knowledge and guide them in which
Technology Company they should invest in. Mr. Kartik considered their request and started
providing paid advisory regarding investment in Technology and Fintech Sector stock. By the end of
FY 2022, Mr. Kartik’s clients made a good amount of profit based on the advice provided by Mr.
Kartik.
The overall income (gross) earned by Mr. Kartik is mentioned below:
Client Name Statutory Audit Other Advisory Investment Advisory
Service Fee Service Fee Service Fee
Fondue Forte Pvt. Ltd. - 6,57,000 2,36,200
Home Made Pvt. Ltd. 7,50,000 - 6,75,000
Home Fresh Pvt. Ltd. (Fully owned 3,45,000 - 12,50,000
subsidiary of Home Made Pvt. Ltd.)
Whether Mr. Kartik can do so?
(a) Mr. Kartik is allowed to provide investment advisory services to its clients under section 144 of the
Companies Act, 2013. Hence, Mr. Kartik is not liable for professional misconduct.
(b) Mr. Kartik cannot provide investment advisory services directly or indirectly to the company or its
holding company or subsidiary company as per section 144 of the Companies Act, 2013. Moreover, a
Chartered Accountant in Practice is not permitted to render any service which is out of the scope of the
approved Management Consultancy Service.
(c) Mr. Kartik can provide investment advisory services directly or indirectly to the company or its holding
company or subsidiary company as per section 144 of the Companies Act, 2013 up to ₹ 50,00,000 in
each calendar year. Hence, Mr. Kartik is not liable for professional misconduct.

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(d) Mr. Kartik can provide investment advisory services directly or indirectly to the company or its holding
company or subsidiary company as per section 144 of the Companies Act, 2013 up to ₹ 5,00,000 in each
calendar year. Hence, Mr. Kartik is liable for professional misconduct. [MTP-Sep.22]
94 CA. Ansh, the auditor of Rajul Limited, a company in which Government of Puducherry holds 49% & a
Central PSU holds 51% of the shares, resigned from the post on 1st June 2022 due to his personal
reasons. CA. Babu was appointed as the subsequent auditor of the company by the board of directors
on 16th June 2022. One of the shareholders came to know about this information and contended that
this appointment is not valid as per the provisions of Companies Act. Is the contention of the
shareholder, right? If so, why?
(a) No. The appointment of auditor is valid since the appointment is made within 30 days from the date of
resignation of CA. Ansh.
(b) Yes. The appointment of auditor is not valid. Since the appointment is made within 30 days from the
date of resignation of CA. Ansh, it should have been done by the shareholders and not the board of
directors. Board of directors can make the appointment only if no auditor is appointed even beyond 60
days.
(c) Yes. Since the appointment is made within 30 days from the date of resignation of CA. Ansh, it should
have been done by C&AG and not by the Board of directors. Board of Directors can make the
appointment only if no auditor is appointed even beyond 30 days.
(d) Yes. The appointment of auditor is not valid. Since the appointment is made within 30 days from the
date of resignation of CA. Ansh, it should have been done by the shareholders and not the board of
directors. Board of directors can make the appointment only if no auditor is appointed even beyond 30
days. [MTP-Oct.22]

Chapter – 7: Audit Reports

95 SKJ Private Ltd. has an annual turnover of INR 200 crore and profits of INR 25 crore. The company is
engaged in the business of textiles and has fairly stable operations over the years. There has not been
much growth in the company in the last few years despite the attempts of the management. Currently
the management is more focused towards cost cutting and has been considering all the options to
achieve that objective.
The statutory auditors of the company have been auditing the financial statements for the last 3
years and have issued clean reports over these years.
During the financial year ended 31 March 2023, management got a large project from a new
customer which resulted in significant increase in the turnover of the company. However, the
profitability of the company did not improve much because the margins in the contract were not
high.
The statutory auditors during the course of their audit of financial statements for the year ended 31
March 2023 (their fourth year of audit) did not agree with the revenue recognition criteria followed
by the company. Since the matter was significant, lot of discussions/ debates happened between the
auditor and the management. But it was finally agreed that the auditors would qualify their audit
report.
Auditors wanted that the management should explain this matter in detail in the notes to accounts to
the financial statement over which the auditors are qualifying the audit report. However, the
management had a different view. Management said that if the auditor is qualifying his report then

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Part I – Multiple Choice Questions
why should the management also highlight that matter in the financial statement and hence refused
to include any note for the same.
On account of the conflict, since audit is not getting concluded. You are required to suggest how the
matter get resolved?
(a) In the given situation, if the management does not agree to give a note in the financial statements then
the auditor should not hold the audit report. However, in such a case, the auditor would need to give
disclaimer of opinion in his report instead of qualification.
(b) The argument of the management seems correct. Auditor cannot do both the things i.e. to qualify and
then also get that highlighted in the financial statements. That note would not be beneficial for the
users of the financial statements.
(c) In case of such matters related to revenue recognition, it is always better to give detailed explanation in
the notes to accounts to the financial statements. If the explanation is satisfactory then the auditor
should also consider giving emphasis of matter instead of qualification.
(d) The requirement of the auditor is beneficial for the company because by giving an explanation of the
matter, on which auditor has given a qualification, in the notes to accounts, the management would be
able to explain their perspective/ point of view to the users of the financial statements. In that case,
auditor while giving the qualification can give reference to the notes to accounts otherwise the entire
matter would form part of the audit report. However, the auditor should not hold his report if the
management does not want to give any explanation in the notes to accounts.
96 KJA Ltd. is in the business of manufacturing of tiles and sanitaryware. The company has a large
inventory every year. Annual turnover of the company is INR 3000 crores. The company has 7 plants
across India. The management of the company carries out physical verification of inventory every
year at the time of reporting date. During the year ended 31 March 2023, it was found by the
management that the inventory sheets of 31 March 2022 did not include five pages containing details
of inventory worth INR 24.5 crores. Management has included this inventory in the valuation of
inventory as of 31 March 2023. Management has also explained that considering the size of the
company this may happen at times as the inventory is huge and lying at various locations. Moreover,
the amount of the inventory is insignificant if considered as a percentage of revenue or inventory.
State how you will deal with this matter as an auditor in the accounts of the company (towards
substantive audit procedures and excluding the impact on auditor’s assessment under Internal
Financial Control Framework) for the year ended 31 March 2023.
(a) Since the matter is not relevant/material to current period figures, no reporting in respect of this
matter would be required in the auditor’s report for the year ended 31 March 2023.
(b) Management should restate the financials to adjust the error. Otherwise auditor may modify his
opinion on current year's financial statements considering the materiality.
(c) Considering the matter is not relevant/material to current period figures, the management may include
a note in the financial statements and basis that no reporting in respect of this matter would be
required in the auditor’s report for the year ended 31 March 2023.
(d) Include an emphasis of matter because of the effects or possible effects of the error in the auditor’s
report for the year ended 31 March 2023. [RTP-May 19]
97 ABC 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 ₹ 10,000 crores with profits of
₹ 2,000 crores.
During the course of the audit, the audit team spends significant time on audit of revenue – be it
planning, execution or conclusion. The audit team for this engagement comprises of approx. 70-80

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Part I – Multiple Choice Questions
members. The company’s contracts with its various customers are quite complicated and different.
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 2023, the audit partner was discussing
significant matters with the management wherein he also communicated to the management that he
plans to include revenue recognition as key audit matter in his audit report. The management was
quite surprised to understand this from the auditor and did not agree with revenue recognition to be
shown as key audit matter in the audit report. As per the management, the auditors didn’t have any
modification and such a matter getting reported as key audit matter would not go down well with
various stakeholders and would significantly impact the financial positions of the company in the
market. The auditors were not able to convince the management in respect of this point and there
was a difference of opinion.
You are requested to give your view in respect of this matter.
(a) The concern of the management is valid. For such a large sized company, such type of matter getting
reported as key audit matter is not appropriate.
(b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter and hence
should be reported accordingly by the auditor in his audit report.
(c) Reporting revenue as key audit matter when the auditor does not have observation in that area leading
to any modification in his report, would not be appropriate.
(d) This being the first year of reporting of key audit matters, the auditor should take a soft stand and
should avoid reporting such controversial matters in his report. [RTP-Nov. 19]
98 A Ltd. is engaged in the business of providing management consultancy services and have been in
operation for the last 15 years. The company’s financial reporting process is very good and its
statutory auditors always issued clean report on the audit of the financial statements of the
company. The auditors were required to be rotated due to mandatory audit rotation requirement of
the Companies Act, 2013.
MN & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the company
for a term of 5 years and have to start their first audit for the financial year ended 31 March 2023.
The auditors had a detailed and clear discussion with the management that they will perform their
audit procedures in respect of opening balances along with the audit procedures for the financial
year ended 31 March 2023. Management agreed with that and the audit was completed as per the
plan.
The auditors did not have any significant observations and hence they communicated to the
management that their report will be clean. Management was quite happy with this and also
requested the auditors to share draft report before issuing the final report.
In the draft audit report, all the particulars were fine except ‘other matters paragraph’ wherein the
auditors gave a reference that the financial statements for the comparative year ended 31 March
2022 was audited by another auditor. Management asked the audit team to remove this paragraph as
the auditors had performed all the audit procedures on opening balances also. But the auditors did
not agree with the management.
Please advise the auditor or the management whoever is incorrect with the right guidance.
(a) The contention of the management is valid. After performing all the audit procedures, an auditor
should not pass on the responsibility to another auditor by including such references in his audit
report.

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(b) Any auditor has two options, either to perform audit procedures on opening balances or given such
reference of another auditor in his report. Auditor cannot mix up the things like this auditor has done.
It is completely unprofessional.
(c) In the given situation even if the auditor wants to give such reference, the management and the auditor
should have taken approval from the previous auditor at the time of appointment of new auditor. In
this case, it cannot be done.
(d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor is
required to include such reference in his report as per the requirements of the auditing standard.
[RTP-Nov. 19]
99 The auditor shall express opinion when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements
(a) Adverse
(b) Qualified
(c) Disclaimer of opinion
(d) Clean [MTP-May 20]
100 CA Kamal is the statutory auditor of Autocover Ltd. for the FY 2022-23. The company is engaged in
the business of manufacture of car accessories. CA Kamal noticed that the inventories of the company
amounting to ₹ 46 crores (equal to 25% of the total assets of the company) at the end of the year do
not exist. Also, sales amounting to ₹ 33 crores (equal to 10% of the total sales during the year) have
not actually occurred. CA Kamal noticed both the material discrepancies just before the finalisation
of the audit report for the year ending 31.03.2023. CA. Kamal considers that the above misstatement
would distort the true and fair view to a greater extent.
What is correct course of action that CA Kamal should consider in such a situation?
(a) CA Kamal should consider withdrawing from the audit engagement or issuing a disclaimer of opinion
for the FY 2022-23.
(b) CA Kamal should consider issuing an adverse opinion and mentioning both the material discrepancies
in the basis for adverse opinion paragraph of the auditor’s report.
(c) CA Kamal should ask the management to explain both the discrepancies in the notes to accounts and he
himself should highlight the matter in the Key Audit matter paragraph of the auditor’s report.
(d) CA Kamal should give a qualified opinion along with the specific mention of the matters in the
Emphasis of matter paragraph in the auditor’s report along with appropriate disclosure in the notes to
accounts to be made by the management of Autocover Ltd. [MTP-March 21]
101 Preparing the financial statements in accordance with the applicable financial reporting framework
is the responsibility of the management of ABC Ltd. Which of the following is correct in regard to the
disclosure of such management responsibility?
(a) This is implied responsibility of management and is presumed in an audit of financial statements and
therefore need not be specifically mentioned anywhere.
(b) The management may undertake to accept such responsibility through an engagement letter itself.
(c) The auditor’s report should describe the management responsibility in a section with heading
“responsibility of management for financial statements”.
(d) The auditor’s report should refer to the responsibility of auditors and not that of the management as
the same is obvious. [MTP-March 21]

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102 During the conduct of audit, it was found that the management has intentionally made material
misstatements in the several items of the financial statements to deceive the users of the financial
statements, to reduce the pressures of meeting market expectations and to increase the reputation of
the company. What would be the implications on the auditor’s report if no adjustments are made to
the financial statements regarding the misstatements made by the management?
(a) The auditor would issue a qualified audit opinion stating that ‘except for’ these matters the financial
statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
paragraph below the opinion paragraph.
(b) The auditor would issue an adverse audit opinion stating that ‘except for’ these matters the financial
statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
paragraph below the opinion paragraph.
(c) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give a true
and fair view’. The auditor should also include a ‘Basis for Adverse Opinion’ paragraph below the
opinion paragraph.
(d) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give a true
and fair view’. The auditor should also include a ‘Basis for Qualified Opinion’ paragraph below the
opinion paragraph. [MTP-April 21, Sep 23]
103 While verifying the salary expense of employees, the auditor has been asked to rely on the values as
per SAP software and some hard copy reports and documents as the HRMS package (source
software) has become corrupt during the year and the management is not having any data backup.
How should the auditor deal with this issue?
(a) The auditor should issue a disclaimer of opinion as records are destroyed and he is unable to obtain
sufficient appropriate audit evidence.
(b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit evidence
before disclaiming the opinion.
(c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls.
(d) The auditor can rely on the SAP data and there is no need for qualification of report.
[MTP-April 21, April 22]
104 M/s Brahmi and Associates have been appointed as the statutory auditor of Prompton Leaves
Limited, a manufacturer of gas geysers for the FY 2022-23. During the course of audit, the auditor
found that two customer complaints have been filed against the company in the FY 2022-23, for the
use of sub-standard pipes and wires in manufacture of gas geysers. The gas geyser blasted at high
temperature leading to severe injuries to the family of complainant along with damage to their
property. They have sought a demand of rupees 10 crore. However, the lawyer of Prompton Leaves
Limited believes that such claim is unsustainable as the incident occurred due to short circuit at both
the complainants place. The management of Prompton Leaves Limited accordingly did not include
any reference to the litigation in the financial statements. The auditor obtained legal advice from
some independent lawyer according to whom the outcome of the case is not ascertainable as of now.
(a) The statutory auditor should give an unqualified opinion.
(b) The statutory auditor should give an unqualified opinion with Emphasis of Matter paragraph.
(c) The statutory auditor should withdraw from the audit engagement.
(d) The statutory auditor should give a qualified opinion. [MTP-Mar. 22]
105 Moon Ltd. is a company engaged in the manufacture of iron and steel bars. VP & Associates are the
statutory auditors of Moon Ltd. for the FY 2022-23. During the course of audit, CA Vikash, the
engagement partner, found that the Company’s financing arrangements have expired, and the
amount outstanding was payable on March 31, 2023. The Company has been unable to re-negotiate

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or obtain replacement financing and is considering filing for bankruptcy. These events indicate a
material uncertainty that may cast significant doubt on the Company’s ability to continue as a going
concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal
course of business. The financial statements (and notes thereto) do not disclose this fact.
What opinion should CA Vikash express in the case of Moon Ltd.?
(a) Unmodified opinion.
(b) Qualified opinion.
(c) Adverse opinion.
(d) Disclaimer of opinion. [RTP-May 22, MTP-April 23]

Chapter – 8: CARO, 2020

106 One of your team members has recently qualified as a chartered accountant and joined your team to
audit a portfolio of audit clients who are private companies. One of the clients Surrey Pvt. Ltd. is a
hotel in the small town near Jaipur. The revenue generated for the current year ended is ₹ 10.5
crores and the entity is not a holding or subsidiary of any public company. The owner of the business
Mr. Hazelwood runs this family business from last 10 years. Your team member is keen to know
whether Surrey Pvt. Ltd. is required to comment on the matter prescribed under CARO 2020. Which
of your explanations to him are correct?
(a) The entity’s revenue exceeds ₹ 10 crores. Hence, no need to comment on the matter prescribed under
CARO, 2020.
(b) The entity is not a holding or subsidiary of any public company, hence no need to comment on the
matter prescribed under CARO, 2020.
(c) The entity’s revenue for the year is ₹ 10.5 cr. which exceed the limit of ₹ 10 cr. Hence, the entity has to
provide the comment on the matter prescribed under CARO, 2020.
(d) The entity is not a holding or subsidiary of any public company, hence there is a need to comment on
the matter prescribed under CARO, 2020. [MTP-March 19]
107 Kinfin Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C) 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 (Financial Institution X) of ₹ 36 lacs. As on 30th October 2022,
the management used the overdraft fully of the A & C bank to the tune of ₹ 40 lacs each. However, the
overdraft of second bank (Bank B) was not used until 31st December, 2022. On 31st December, 2022,
Management took overdraft of B bank and very next day management paid the overdraft of C bank as
the rate of interest charged by Bank C on overdraft facility was 15% whereas, the rate of interest
charged by Bank B was 12%. As at 31st March 2023 only overdraft of Bank A and Bank B were used
fully, overdrafts of Bank C and Financial Institution X were unused. The paid-up capital and reserves
of the company as at that date was ₹ 85 lacs and its revenue for the financial year ended on 31st
March 2023 was ₹ 8.95 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. With
respect to the loans, management was of the view that the total outstanding as at 31 March 2023 is
less than the prescribed limit. The company further contended that loan limit is to be reckoned per
bank or financial institution and not cumulatively. Comment.
(a) The CARO, 2020 is applicable to the company as the turnover of the company exceeds the prescribed
limit.

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(b) The CARO, 2020 is not applicable to the company as the turnover of the company does not exceeds the
prescribed limit.
(c) The CARO, 2020 is not applicable to the company as the borrowing of the company does not exceeds
the prescribed limit.
(d) The CARO, 2020 is applicable to the company as the borrowing of the company exceeds the prescribed
limit. [MTP-Nov. 21]
108 While reporting under clause (ii) of Paragraph 3 of CARO, 2020, which of the following is correct:
(a) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
shortages within the class of an inventory and must be based on value for each class of Inventory.
(b) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
shortages within the class of an inventory and must be based on value for all classes of Inventory.
(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages
within the class of an inventory and must be based on value for each class of Inventory.
(d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages
within the class of an inventory and must be based on value for all classes of Inventory.
[MTP-April 22]
109 KFintech Pvt Ltd was having paid-up share capital and reserves of ₹ 150 lakh including paid-up share
capital of ₹ 90 lakh at the end of FY 21-22. During FY 22-23, KFintech borrowed ₹ 80 Lakh from Bank
A and ₹ 140 Lakh from Bank B. The amount borrowed from Bank B was repaid during the same FY.
For FY 21-22 the turnover of the company was ₹ 1,850 lakh. Select the appropriate option with
respect to the applicability of CARO 2020:
(a) CARO, 2020 will be applicable as the paid-up capital and reserves exceeding the limit specified in the
Order i.e., one crore rupees.
(b) CARO, 2020 will be applicable as the company has paid-up capital and reserves exceeding the limit
specified in the Order i.e., one crore rupees and have total borrowings exceeding one crore rupees from
any bank or financial institution at any point of time during the financial year.
(c) CARO, 2020 will not be applicable as the company repaid the amount borrowed from bank B before the
end of the financial year and hence, the borrowings do not exceed the limit specified in the Order.
(d) CARO, 2020 will not be applicable as the company will fall under the exemption provided in the Order
for Small Company as per section 2(85) of the Companies Act 2013. [MTP-Sep. 22]
110 CA. A, the auditor of XYZ Limited resigned from the post due to his personal reasons. CA. B was
appointed as the subsequent auditor of the company by the Board of Directors. During the
conclusion of the audit for the FY, should CA. B mention about CA. A’s resignation in the Companies
(Auditor’s Report) Order 2020?
(a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA. A and state if he
has taken into consideration the issues or objections raised by CA. A.
(b) No. Since the resignation of CA. A is due to his own personal reason, the same need not be reported
under CARO.
(c) Yes. As per clause (xxi) of para 1 of CARO, CA. B should report the resignation of CA. A and state if he
has taken into consideration the issues or objections raised by CA. A.
(d) No. CARO 2020 does not state any requirements to report resignation of auditor. However, the same
needs to be mentioned by CA. B in the Audit Report under Other Matter Paragraph, as per SA 706.
[MTP-Oct. 22]

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111 While auditing with respect to compliance with CARO, 2020, Mr. Omprakash, for additional
reporting purpose, observed the following, relevant to Para 3(vii) of CARO, 2020:
Statutory Dues Undisputed Date Payable Date Paid
Amount
(₹ in lakh)

Provident Fund 1.50 24 September, 2022 27 March, 2023

GST 2.45 23 October, 2022 24 April, 2023
Customs Duty 0.65 20 September, 2022 10 April, 2023
Income Tax Demand for
A.Y. 2020-21 0.55 23 October, 2022 Not paid till date
Also, a representation was made to GST Department for waiving a penalty of ₹ 1 lakh for late
payment of GST demand. What total amount of statutory dues need to be reported by Mr. Omprakash
as per Para 3 of CARO?
(a) ₹ 3.10 lakh.
(b) ₹ 0.65 lakh.
(c) ₹ 3.65 lakh.
(d) ₹ 2.70 lakh. [RTP-Nov. 22]

Chapter – 9: Audit of Consolidated F.S.

112 BCO Private Limited is operating in India for the last 15 years. It has three group companies – one
subsidiary in India and the other two in Ireland and France. All these subsidiaries were acquired one
by one and investments were made in these companies gradually i.e. initially control was not
obtained and after investment for some period, control was obtained. The statutory auditors have
evaluated that all the group companies are significant for the purpose of audit of consolidated
financial statements.
During the year ended 31 March 2023, the audited financial statements of all the components are
available except for French company whose audit got delayed and would not get completed before
the release date of CFS of parent company. For the purpose of consolidation, the parent company has
provided the audited financial statements of other components.
Please suggest what can be the possible situation in respect of financial statements of French
company for the purpose of consolidation for the purpose of audit of CFS.
(a) Since the audit of French company is in progress, its financial statements subject to audit can be
considered by auditor of parent company and audited signed financials can be given to auditors even
after release of audited CFS as this is matter of documentation only.
(b) The management should give management accounts to the auditors of CFS and auditor can mention the
same point in other matters paragraph in his audit report which is an acceptable approach.
(c) Auditor should get the financial statements of French company excluded from CFS.
(d) If the auditor does not receive audited financial statements of French company, he should modify his
audit report.
113 KB Ltd. is engaged in the business of construction. It has multiple subsidiaries and associates in
India. The company acquired PPP Gmbh in Germany on 1 February 2023. The company also obtained
control in PPP Gmbh on the same date. Its investment in PPP Gmbh was of a huge amount. The

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company has been preparing its CFS over the last few years and this has also become a matter of
concern for the company for the year ended 31 March 2023. The management is of the view that
consolidation of PPP Gmbh would not be required in CFS for the year ended 31 March 2023 because
this is the first year of acquisition. However, the auditors have not been agreeing for the same. The
timeline of submission of audited financial statements is due in few month time.
In the meantime, the management moved on the consolidation of PPP Gmbh taking audited financial
statements of PPP Gmbh which are available in the GAAP of its local country and GAAP conversion
adjustments from its local GAAP to Indian GAAP have been made by the parent company. GAAP
conversion adjustments are significant at CFS level. In the meantime, the management has also been
consulting whether the consolidation would be required or not also considering the fact that
comparative figures in case of PPP Gmbh would not be available.
Further the auditors have also raised observations regarding the GAAP conversion adjustments over
which management has a disagreement. As per the management the auditors are not required to
comment on GAAP adjustments because audited financial statements of PPP Gmbh have been given
to the auditors. Please help to resolve these matters.
(a) Consolidation of PPP Gmbh should be done but GAAP conversion adjustments are not required to be
audited.
(b) Consolidation of PPP Gmbh should not be done and accordingly, GAAP conversion adjustments would
not arise.
(c) Consolidation of PPP Gmbh should be done and GAAP conversion adjustments are also required to be
audited.
(d) Consolidation of PPP Gmbh is a choice of management as the accounting standard does not mandate
this. However, in case it is done then the GAAP conversion adjustments would be required to be
audited.
114 VDN Ltd. is a medium-sized company engaged in the business of retail. It has two subsidiaries and
one joint venture. Both the subsidiaries are larger in size as compared to the parent company. The
accounting policies of the parent company, its subsidiaries and joint venture were same. However,
during the year ended 31 March 2023, one of its subsidiary, SMA Pvt. Ltd changed the method of
depreciation of Property, plant and equipment (PPE) to written down value method which is
different from the method followed by the parent company i.e. Straight line method. Further this
subsidiary also changed the method of valuation from FIFO to Weighted average method which has
become different from parent as the parent follows FIFO method.
These changes were made by the subsidiary because it reflected the better picture of its standalone
financial statements. Now for the purpose of CFS, the auditors have asked the management of parent
company to ensure that accounting policies of the group companies should align with that of parent
in line with the requirements of accounting standard. But the management of parent and subsidiary
company believe that out of three group companies other than parent, only one group company
requires this change for the purpose of consolidation and the same should be ignored by the
auditors. Please suggest.
(a) The view of management is correct.
(b) For CFS, method of depreciation of SMA Pvt. Ltd may continue to be different, however, method of
valuation of inventory should be aligned with that of the parent.
(c) For CFS, method of valuation of inventory of SMA Pvt. Ltd may continue to be different, however,
method of depreciation should be aligned with that of the parent.
(d) The auditor should get these changes made in the standalone financial statements of SMA Pvt. Ltd.

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115 AJ Private Ltd is engaged in the business of retail having annual turnover of ₹ 1,800 crore. The
company has a plan to get listed on Bombay Stock Exchange next year. The company has 3 associates,
4 subsidiaries, and 1 joint venture. The company prepares its consolidated financial statements on a
quarterly basis for the purpose for internal purposes. The quarterly financials are reviewed by the
statutory auditors of the company.
The group companies of the parent company have increased in terms of their size looking at the total
assets and revenue of the group.
For the purpose of audit of consolidated financial statements for the year ended 31 March 2023,
management has request the statutory auditors that it would be able to provide management
certified accounts of the joint venture as its audit would not get completed on time and even without
joint venture, the auditors would be able to cover 75% of the total assets of the group at consolidated
level.
However, the statutory auditors are insisting that they need to cover at least 80% of the total assets
of the group at consolidated level as per the requirements of the Auditing Standards and for that
financials of the joint venture should also be audited. Please advise.
(a) Auditors should accept the management certified accounts of joint venture; evaluate implications on
audit report as qualification will be required for unaudited components as per SA 705.
(b) Auditors cannot accept management certified accounts of joint venture and should report the matter to
the Registrar of Companies.
(c) Auditors cannot accept management certified accounts of joint venture and should report the matter to
the Securities and Exchange Board of India, considering the plan to get listed next year.
(d) Auditors should accept management certified accounts of joint venture provided the revenue of the
joint venture is less than 10% of the total revenue of the group.
116 Advik Ltd. is an unlisted public company. The company acquired few companies in the last 3-4 years
which have been assessed as its subsidiaries/ associates/ joint ventures (hereinafter jointly called as
‘components’). The company prepares its condensed consolidated financial statements every quarter
to review the performance of the group. In the past years, the company used to get the financials of
its components reviewed/ audited on a quarterly basis. AJ & Co LLP is the statutory auditor of parent
company and KSH & Associates is the statutory auditor of all the components. Quarterly condensed
consolidated financial statements of the group are reviewed by the statutory auditors as per the
terms of the engagement letter.
AJ & Co LLP has communicated to Advik Ltd. that in line with the requirements of the Companies Act
2013, it would also be required to undertake audit/ limited review of all the components which
would be consolidated with those of Advik Ltd. and for which KSH & Associates are the statutory
auditors currently.
Management is not agreeing with the same as they don’t want to change KSH & Associates as auditors
of the components and the requirement mentioned by AJ & Co LLP would lead to duplication of work
of auditors as well as the management. Please advise.
(a) In an audit/review of consolidated financial statements (whether condensed or complete), the
principal auditor is required to perform various procedures in accordance with SA 600, Using the work
of another auditor and hence the requirement of auditor is valid.
(b) In an audit/review of consolidated financial statements (whether condensed or complete), the
principal auditor is required to perform various procedures in accordance with the requirements of the
Companies Accounts and Audit Rules 2014 and hence the requirement of auditor is valid.

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(c) In an audit/review of consolidated financial statements (whether condensed or complete), the
principal auditor is not required to re-perform audit/ limited review of the components and hence the
requirement of auditor is not correct.
(d) Management and the auditor need to decide this mutually as this is based on the contractual
arrangement between them.
117 CIC Ltd., a listed entity in India, is in the business of infrastructure activity having an annual turnover
of ₹ 3100 crores. The company has various projects offices in India and outside India. The functional
currency of the company and its project offices is INR (₹). The company has 3 joint ventures and
various jointly controlled operations. The company has been audited by Garg & Associates, a firm of
Chartered Accountants, since beginning. For the year ended 31 March 2023, new auditors were
appointed due to rotation provisions. New statutory auditors have raised certain points related to
the consolidation procedures followed by the company.
Management did not agree to the observations of the new auditor arguing that they have been
following this since many years now and there was no observation of previous auditors in respect of
the same. New auditor highlighted a point that joint ventures have been consolidated by the
company in its standalone financial statements. However, management argues that those are in the
nature of its operations and hence to reflect the true and fair view it would be appropriate to
consolidate the same in the standalone financial statements.
Please advise as auditors how would you deal with this matter.
(a) Since the matter is related to consolidation which is more relevant for consolidated financial
statements, hence no reporting in respect of this matter would be required in the auditor’s report for
the year ended 31 March 2023.
(b) Auditor should request the management to restate the financials to adjust the error related to
consolidation of joint ventures in standalone financial statements. If adjustments not made, auditor
may modify his opinion on current year's financial statements considering the materiality.
(c) Auditor should look at the materiality and conservatism principle. Company has included extra
information in the financials which can be considered by the auditors and basis that clean audit report
should be given.
(d) As per the requirements of accounting standard, joint venture if consolidated in standalone financial
statements should not be consolidated again in the consolidated financial statements. Basis that this
point should be dropped by the auditor. [RTP-May 19, MTP-March 23]
118 ABC Private Ltd. is a joint venture of OM Gmbh and KBC Ltd. OM Gmbh is a listed company in
Germany and prepares its financial statements as per IFRS. KBC Ltd. is an Indian listed company and
prepares its financial statements as per Ind AS. For the purpose of reporting of financial information
to OM Gmbh and KBC Ltd. for consolidation purposes, ABC Private Ltd. uses reporting package
(which comprises of balance sheet, profit and loss and other notes to accounts).
ABC Private Ltd. prepares its financial statements as per Ind AS. It has taken useful life of some fixed
assets in its Ind AS financial statements based on their useful lives which is different from the useful
lives of similar nature fixed assets taken by OM Gmbh (in line with their accounting policies). The
reporting package of ABC Private Ltd. is audited before reporting to OM Gmbh. The auditor audits the
reporting package which is prepared in line with the Group accounting policies of OM Gmbh and
mentions in his report that the reporting package has been prepared as per the Group accounting
policies of OM Gmbh.
ABC Private Ltd. makes an adjustment for changes in useful lives in the reporting package on the
basis of Group accounting policies of OM Gmbh. The auditor has asked the management to take same

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useful lives of fixed assets in the reporting package which have also been taken by them in its Ind AS
financial statements. Management has not agreed with the view of the auditor. Select the correct
course of action.
(a) Position taken by the management is correct.
(b) Position suggested by the auditor is correct and if the management does not agree then auditor may
modify his report on the basis of materiality.
(c) The matter relates to an estimate (i.e. useful life) which may be subject to changes under different
GAAPs and hence auditor should ignore this point.
(d) As the report would be for a special purpose hence it needs to be a clean report. [RTP-May 19]
119 H Ltd. is a holding company with two subsidiaries S1 Ltd. and S2 Ltd. ABC and Associates, a chartered
accountant firm have been given the task of covering the valuation of non-current tangible assets in
the consolidated financial statements. Firm noticed that H Ltd. and S1 Ltd. adopt straight line method
of depreciation for its assets whereas S2 Ltd. follows WDV for calculating the depreciation. Advise
which of the following adjustment would be required in respect of the preparation of consolidated
financial statements?
(a) S2 Ltd. is required to depreciate the assets adopting straight line method of depreciation which is the
method adopted by the H Ltd.
(b) H Ltd. is required to make suitable adjustments as to the depreciation charged by S2 Ltd., at the time of
consolidation.
(c) H Ltd. and S1 Ltd. are required to depreciate the assets adopting WDV method to facilitate the
harmonization of accounting policies.
(d) No adjustment is required as there can be different methods of depreciation for its assets for the group
companies.
120 CA Ajay was appointed as the statutory auditor of TUV Ltd. at Delhi. TUV Ltd. has a branch office at
Pune. A branch auditor, CA Suresh, was appointed to conduct the audit of the Pune branch of TUV Ltd.
CA Ajay provided CA Suresh with a questionnaire regarding the details of the branch office of certain
specific accounts and balances to be filled in by CA Suresh in which indication of material
misstatements are involved. However, CA Suresh denied to fill such questionnaire as he explained
that CA Ajay, as the principal auditor has no such right. Which is the relevant SA and which of the
following course of action is correct in this regard?
(a) SA 600 is the relevant SA; CA Ajay is correct in asking for information from CA Suresh through a
questionnaire.
(b) SA 610 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as a principal
auditor can refer to branch auditor’s report or other branch records but cannot ask the branch auditor
to provide any specific information by filling a questionnaire.
(c) SA 600 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as CA Ajay instead
of asking CA Suresh to send the filled-up questionnaire, should himself verify the specific branch details
as indication of material misstatement is there.
(d) SA 610 is the relevant SA; CA Ajay should seek management’s permission before asking the branch
auditor for any information. [MTP-Oct. 20]
121 B Limited controls entity C Limited (75%) and entity A Limited (an investment company). Entity B
Limited reduced the control of entity C Limited from 75% to 60%. With regard to that certain
adjustments were made to account for the change in the shareholding of entity C Limited which is
consolidated. These adjustments are known as:

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(a) Memorandum adjustments.
(b) Current period consolidation adjustments.
(c) Permanent consolidation adjustments.
(d) Temporary period consolidation adjustments. [MTP-March 21]
122 Shrenik Ltd. was set up initially as a private limited company. Subsequently, it got converted into a
public company. The company’s management has plans of expansion, but the business was not
growing in an organic manner. Therefore, the management decided to acquire the competitors.
During the financial year ended 31st March, 2023, the company acquired two companies in India and
France in September, 2022 and January, 2023 respectively. The company controls both of these
companies as per the criteria’s laid down in the Companies Act, 2013 as well as the applicable
accounting standards. The management started discussions with the auditors regarding the audit
wherein it was also pointed out by the auditors that the management should also prepare
consolidated financial statements, if they want. Management needs your advise on the same.
(a) Management must prepare the consolidated financial statements as per the requirements of the
Companies Act, 2013.
(b) Management has a choice not to prepare consolidated financial statements but should go for that
considering that its true performance and financial position can then be demonstrated.
(c) Management could have prepared consolidated financial statements if the acquired companies would
have completed at least one year post acquisition.
(d) Management must prepare consolidated financial statements, but it should include only the company
acquired in India. [MTP-Oct.21, April 22]

Chapter – 10: Audit of Dividend

123 SuperFin Rollers Ltd. has declared dividend of 10% on 22nd April, 2023, for the year ended 31 March
2022. The company did not pay or transfer the dividend declared to its 4 shareholders (Mr. Sunil, Mr.
Mukesh, Mr. Rakesh & Mr. Haresh) who were entitled to receive the dividend. Upon inquiry by the
auditor regarding the reason, the Executive Director Mr. Ram provided that there is a legal dispute
regarding the right to receive the dividend for these four shareholders. Executive Director Mr. Ram
decided not to take any further step to pay the dividend till the time the disputes were not resolved.
In the light of the same, kindly guide the auditor with respect to the penalty in the current case as
per section 127 of the Companies Act.
(a) Executive Director Mr. Ram shall be liable to pay simple interest at the rate of 12% per annum during
the period for which such default continues.
(b) Executive Director Mr. Ram shall be liable to pay simple interest at the rate of 18% per annum during
the period for which such default continues.
(c) Executive Director Mr. Ram punishable with imprisonment which may extend to two years and with
fine which shall not be less than 1,000 for every day during which such default continues.
(d) Executive Director Mr. Ram is not liable for punishment as there is no offence u/s 127 section of the
Act. [MTP-Nov. 21]

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Chapter – 11: Audit Committee and Corporate Governance

124 The Audit Committee should consist of the following:

(a) Minimum of 3 directors with independent directors forming a majority.
(b) Minimum of 4 directors with only one independent director.
(c) Minimum 2 directors which are independent.
(d) Minimum 5 directors with 1 independent woman director.
125 ABC Ltd. is one of the top 1000 listed entities on the basis of market capitalisation. The Board of
Directors of ABC Ltd. does not comprise of any women director. The Statutory Auditor who is
certifying Corporate Governance as per SEBI regulations, has to ascertain that –
(a) The Board of directors will have at least 2 independent woman director.
(b) The Board of directors will have at least 1 independent woman director.
(c) The Board of directors will have at least 5 independent woman director.
(d) The Board of directors need not have any independent woman director.
126 The auditor should ensure that the board of directors of the top 100 listed entities shall comprise of –
(a) Not less than 7 directors.
(b) Not less than 4 directors.
(c) Not less than 6 directors.
(d) Not less than 2 directors.
127 The Board of Directors of XYZ Ltd. one of the top 2000 listed entities meets 4 times a year. What
should be the quorum of the Board of Directors from 1st April 2021:
(a) 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 independent director.
(b) 1/3rd of its total strength or 4 directors, whichever is higher, including at least 1 independent director.
(c) 1/3rd of its total strength or 3 directors, whichever is higher, including at least 2 independent director.
(d) 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 non-executive
director.
128 CA. Ish Anand is statutory auditor of Mega Limited, a public limited company engaged in the
manufacturing of textile goods. On verification of the composition of Board of Directors of the
company, he observed that during the reporting period, in one of the board meeting, the chairman
was non-executive director and less than 1/3rd of the Board comprised of Independent Directors.
He wants to examine the effect of changes in the composition of the Board and/or its chairman and
its impact on compliance throughout the reporting period. But the management restricts him from
examining the same. Advise whether he has right to examine the effect of changes in composition of
board?
(a) Auditor has no right to verify the composition of Board and examine the effect of changes in the
composition since it is not related with preparation of financial statements.
(b) Auditor should verify the composition of Board and examine its impact on compliance throughout the
reporting period as a part of certifying compliance with the requirements of corporate governance.
(c) Auditor should verify the composition of Board and examine its impact on compliance throughout the
reporting period as a part of requirement of statutory audit.
(d) Auditor should verify the composition of Board and examine its impact on compliance throughout the
reporting period as a part of requirement of CARO, 2020. [MTP-March 19]

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129 Annual Remuneration payable to a single non-executive director of ABC Ltd. exceeds 50% of the total
annual remuneration payable to all non-executive directors. Which of the following option stands
correct in this situation.
(a) Approval of shareholders by special resolution shall be obtained every year.
(b) Approval of shareholders in general meeting shall be obtained every year.
(c) None of the above
(d) Approval of Board of Directors.
130 XYZ Ltd. is a Public Limited Company engaged in the manufacturing of TMT Bars. M/s. UV &
Associates are the statutory auditors of XYZ Ltd. for the Financial Year 2022-23. The company is
listed on National Stock Exchange. CA Udhav, the engagement partner is considering the
requirements with respect to Regulation 27 and Schedule II (LODR) for corporate governance
compliance of XYZ Ltd. Which of the following is correct in this regard?
(a) XYZ Ltd. shall submit a quarterly compliance report on corporate governance in the format as specified
by its Board from time to time to NSE within 21 days from the close of quarter. The report shall be
signed either by the Compliance Officer or the Chief Executive Officer of XYZ Ltd.
(b) XYZ Ltd. shall submit a monthly compliance report on corporate governance in the format as specified
by its Board from time to time to NSE within 21 days from the end of the month. The report shall be
signed either by the General Manager of the accounts department of XYZ Ltd.
(c) XYZ Ltd. shall submit a quarterly compliance report on corporate governance in the format as specified
by its Board from time to time to NSE within 30 days from the close of quarter. The report shall be
signed either by the Compliance Officer or the Chief Executive Officer of XYZ Ltd.
(d) XYZ Ltd. shall submit the annual compliance report on corporate governance in the format as specified
by its Board from time to time to NSE within 30 days from the year end. The report shall be signed
either by the General Manager of the Accounts Department of the Company. [MTP-May 20]
131 As per Regulation 20 and Part D of Schedule II of SEBI (LODR) Regulations, 2015, who among the
following shall be appointed as Chairman of Stakeholder Relationship Committee?
(a) Small Shareholder Director
(b) Whole time director
(c) Any of the Executive Director
(d) Any of the Non-Executive Director [MTP-Oct. 20]
132 RST Ltd. has a Net Worth of ₹ 80 crore and a market capitalisation of ₹ 350 crore. However, its
ranking is 800 among all the Listed Companies based on the said capital for the previous year. It has
a subsidiary Company PQR Pvt. Ltd. whose net worth is ₹ 25 crore. Whether RST Ltd. and PQR Ltd.
are required to undertake Secretarial Audit?
(a) Both RST Ltd. and PQR Ltd. shall undertake Secretarial Audit.
(b) Only RST Ltd., being a listed entity, is required to undertake Secretarial Audit.
(c) None of them are required to undertake Secretarial Audit since they are not among the top 500
Companies on the basis of Market Capitalisation.
(d) Only RST Ltd. shall undertake Secretarial Audit since it is among the top 1,000 Companies on the basis
of Market Capitalisation. [MTP-Oct. 21]
133 M/s Shiva & Associates have been appointed as statutory auditors of Kailash Ltd. which is the
company registered under Section 8 of the Companies Act, 2013. During the course of audit, CA Shiva
noticed that the Board of Directors have held their meetings only twice, in the financial year under
audit. How should CA Shiva deal with the same in the compliance certificate to be issued by him?

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(a) CA Shiva should give an adverse statement stating that the meeting of board of directors were held only
twice as against the minimum requirement of 4 meetings of financial year.
(b) CA Shiva need not mention regarding the same in the compliance certificate as there is no minimum
requirement of meeting of board of directors in case of companies registered under Section 8.
(c) Kailash Ltd. being a company registered under Section 8 of the Companies Act, 2013 is exempt from
obtaining compliance certificate from the statutory auditors.
(d) Kailash Ltd. is correct in conducting two meeting of board of directors therefore, CA Shiva should not
give an adverse or qualified statement in this regard. [MTP-March 22]

Chapter – 12: Liabilities of Auditor

134 JK Ltd. is a company engaged in the business of software development. It is one of the largest
companies in this sector with a turnover of INR 25,000 crore. The operations of the company are
increasing constantly, however, the focus of the management is more on cost cutting in the coming
years to improve its profitability.
In respect of the financial statements of the company which are used by various stakeholders, some
deficiencies were observed in respect of assets reported therein due to which those stakeholders
suffered damages. As a result, those stakeholders went for a civil action against the company
including all the parties who had the responsibility in respect of those financial statements.
The statutory auditors of the company were also roped in. The statutory auditors went against this
civil action and were able to prove that there was no professional negligence on their part.
It was decided that the loss was occasioned through the negligence of directors and the fault of the
auditor in failing to verify the asset was considered to be only technical.
On the basis of above mentioned facts, what should be the correct option out of the following?
(a) A penalty should be levied on the auditors but that should not be equivalent to the damages suffered by
the stakeholders. The damages would be required to be made good by the directors of the company.
(b) Both the auditors and the directors should be held liable in respect of the deficiencies identified. Both
of them should compensate these stakeholders in respect of the damages and a further penalty of ₹ 10
lakh would be imposed on them.
(c) Auditors and directors should be held liable in this case. Further because the fault of directors is bigger,
they would be subject to a penalty of INR 10 crore or losses suffered by the stakeholders, whichever is
higher.
(d) Since the fault of the auditor is limited to technical in nature, he cannot be held liable for any penalty or
damages. However, he would not be allowed to work for this company and any other company in
similar industry for a period of next 5 years as per the requirements of the Companies Act, 2013.
135 KKR Ltd. is a medium-sized company engaged in the business of e-commerce. The company’s
operations have remained stable over the years and its profitability has been going down. The
company also ventured into different markets over the last few years but that has not helped much in
terms of growth of business or increasing the profitability. The company’s immediate plan is to
expand its operations with focus on increasing the profitability.
The company was looking for funds to achieve this objective and issued a prospectus to the public to
subscribe to its shares.
The financial statements of the company for the year ended 31 March 2023 included in the
prospectus showed a very different picture of the company particularly in respect of its profits.

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It was later on found that some of the information contained in the prospectus was misstated i.e. it
was untrue and misleading to attract the public to subscribe the shares of the company.
Legal action was taken by the stakeholders against the company including its auditors and the
company’s management/ directors were confident that they would not be required to face any action
considering the fact that the financial statements were duly audited by a reputed firm of Chartered
Accountants. If at all any problem arises, it would be the responsibility of the auditors
Please advise whether anyone can be held liable in this matter or not. If yes, what action can be taken
against him/them? If no, what should be the corrective action?
(a) The understanding of the directors is correct and the auditors should be held liable under section 447
of the Companies Act.
(b) The understanding of the directors is wrong. They would be held liable under section 447 of the
Companies Act and not the auditors because responsibility for the prospectus lies with the
management.
(c) This may lead to criminal liability wherein every person who authorises the issue of such prospectus
shall be liable under section 447 of the Companies Act.
(d) This may lead to civil liability wherein every person who authorises the issue of such prospectus shall
be liable under section 447 of the Companies Act.
136 Vimal Kumar, a Chartered Accountant by profession, has been into practice for the over 6 years. He
developed a specialization in respect of matters related to Income Tax and hence got various clients
to whom he was advising.
Other than the taxation work, Vimal was also good in accounting matters but he could not develop
his business/ clientele the accounting services over the period.
He used to represent his clients in respect of income tax returns.
For one of his clients, he, as an authorised representative, prepared the return of income and
furnished the same and other required documents (the particulars of accounts, statements and other
documents supplied to him by the assessee for the preparation of the return) to the Assessing
Officer. He had also conducted an examination of those records and submitted a report on the scope
and results of his examination.
The assessee in this case was a very old client of Vimal and also used to pay him very good
remuneration. In order to provide some benefits to the assessee, Vimal provided certain information
to the assessing officer which was found to be false later on.
In the given case, which of the following options should apply?
(a) Since Vimal only acted as a representative of the assessee, he cannot be held liable. The assessee is the
primary person responsible and accordingly the assessee would be liable to rigorous imprisonment
which may extend to seven years and to a fine.
(b) The given matter does not only relate to submission of the return of income but also covers an
examination of those records and a report on the scope and results of examination by a Chartered
Accountant. Because of the professional responsibilities placed on a CA, it becomes his duty to carry out
all the tasks in an objective manner free from any bias. Hence Vimal would be liable to a penalty of
Rupees seven crore and imprisonment of seven years.
(c) Vimal would be liable to rigorous imprisonment which may extend to seven years and to a fine.
(d) Vimal and his assessee would be liable to a penalty which may extend to ₹ 1 crore. Further because of
the fact that the particulars submitted with the assessing officer belong to the assessee, hence the
assessee would also be liable to imprisonment for three years under the Indian Penal Code.

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137 D.M. Ltd. appointed M/s K.K. & Co., Chartered Accountants as Statutory Auditors. The Statutory
Auditors found the internal audit function reliable and effective. The Statutory Auditor assigned the
task of assessing the inventory levels of a few branches where the Statutory Auditor believed that
there might be some risk of material misstatement to one of the internal auditor Mr. Ryan. Since the
Internal Auditor had recently done such assessment as a part of their internal audit program,
therefore, the Statutory Auditor believed that they could rely on the former’s report. Besides this,
because of the paucity of time the Statutory Auditors also requested Mr. Ryan to help them in some
paperwork including audit documentation.
Before the audit was concluded, Mr. Ryan got promoted and shifted to another city. During the audit
discussion stage, the lead Statutory Auditory found out that the documentation delegated to Mr. Ryan
was not complete. Accordingly, Statutory Auditor further checked the inventory work delegated to
the Internal Auditor, however, it was found to be satisfactory.
In view of the above case scenario, state which of the following statement(s) hold true:
(a) The working of Internal Audit function was reliable and satisfactory; therefore, the allocation of
inventory level work was within the authority of the Statutory Auditor. This was further confirmed by
the satisfactory work of Internal Auditory, as found out later.
(b) The documentation would be considered complete as far as the Statutory Auditor’s responsibility is
concerned as the missing documentation was because of the oversight of the Internal Auditor.
(c) Since the Internal Audit had conducted the similar inventory level checking activity recently, therefore,
because of familiarity with the audit the Statutory Auditor was right in delegating the same to the
Internal Auditor.
(d) The Statutory Auditors should not have delegated the inventory level checking to the Internal Auditor,
as the risk assessed was material. Further, the audit documents are Statutory Auditor’s property and
responsibility. Also, the Statutory Auditor should maintain confidentiality during all the stages of the
audit. Therefore, it was wrong on the part of the Statutory Auditor to handover the task of audit
documentation to the Internal Auditor.
138 Karan and his friends subscribed to the shares of ABC Ltd. ABC Ltd. had issued a prospectus for
issuance of shares against which these persons had subscribed the shares. Later on, it was found that
some information as included in the prospectus was misleading. Karan and his friends filed a case
against the company covering all the parties who were responsible for the prospectus on the ground
that the information contained in the prospectus was misleading and they suffered losses by relying
on that information.
The company consulted this matter with its legal consultants in respect of the course of action to be
taken and also consulted that if the outcome of the case goes against the company then which all
parties may be held liable and what could be the other consequences.
The prospectus included auditor’s report who had also given his clearance. Some of the experts were
also involved in respect of the information on which the litigation was filed.
Subsequently, it was proved that the contention of Karan and his friends was correct. It was held that
the directors, promoters of the company and the experts involved would be liable to pay
compensation to all these persons who had sustained losses or any damage.
The auditors of the company were also asked to make good the losses but they refused with an
argument that it is limited to directors, promoters and experts.
In this context, please suggest which of the following statement is correct.

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(a) The argument of the auditors is valid. As per the final outcome of the litigation the auditors were not
held liable. However, on moral grounds the auditors should contribute towards the losses suffered by
any person.
(b) The argument of the auditors is valid. Since the final outcome of the litigation did not held them liable,
they cannot be asked to contribute towards the losses suffered by any person.
(c) The argument of the auditors is not valid. The final outcome of the litigation covers the experts and
hence the auditors also get covered to contribute towards the losses suffered by the persons.
(d) The outcome of the litigation seems to be completely wrong. The directors and experts were held liable
but along with that the statutory auditors, internal auditors, tax auditors, Company Secretary, tax
consultants and the legal advisors should also have been held liable. Further the promoters cannot be
held liable in such matters. [RTP-Nov.19]

Chapter – 13: Internal Audit

139 The Board of Directors of Young Ltd., a listed company, appointed Mr. Old, a Cost Accountant (not in
practice), to conduct an internal audit of the functions and activities of the company. The job of Mr.
Old would be of an independent management function, involving a continuous and critical appraisal
of the functioning of the company with a view to suggest improvements thereto and add value to and
strengthen the overall governance mechanism of the company, including the entity’s strategic risk
management and internal control system. However, some of the officers of the company are against
the appointment of a Cost Accountant who is not in practice as an internal auditor. State whether
those officers are correct or not in their viewpoint by referring to the provisions of the Companies
Act, 2013?
(a) The view point of the officers is correct because as per section 138 of the Companies Act, 2013, the
internal auditor shall be a chartered accountant in practice only.
(b) The view point of the officers is correct because as per section 138 of the Companies Act, 2013, the
internal auditor shall a cost accountant in practice only.
(c) The view point of the officers is correct because as per section 138 of the Companies Act, 2013, the
internal auditor shall be an employee of the company only.
(d) The view point of the officers is incorrect because as per section 138 of the Companies Act, 2013, the
internal auditor shall either be a chartered accountant or a cost accountant (whether engaged in
practice or not), or such other professional as may be decided by the Board.
140 RMI Ltd. is a listed company in the business of manufacturing and trading of furniture and has annual
turnover of INR 1,800 crore. The company’s business has declined in the last 2 years. The internal
auditors of the company have been very helpful in terms of coming up with observations/
suggestions which have helped the management improve its operations over the years.
The Company set up a plant around 4-5 years ago and the internal auditors have observed that the
management needs to strengthen controls around compliance with Minimum Wages Act, 1948 and
rules framed thereunder. Following were the observations of the internal auditors:
Weekly offs not provided: As per Minimum Wages (Central) Rules, 1950, Rule 23 (2), “Employee shall
not be required or allowed to work in a scheduled employment on the rest day unless he has or will
have a substituted rest day for a whole day on one of the five days immediately before or after the

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rest day, provided that no substitution shall be made which will result in the employee working for
more than ten days consecutively without a rest day for a whole day”.
However, on review of the attendance records of contractual workers, it was noted that contractual
staff worked continuously for more than 10 days, ranging from 13 to 31 consecutive days.
Working hours exceed the maximum limit of 12 hours a day: As per rule 24(2), "The working day of
an adult worker shall be so arranged that inclusive of the intervals of rest, if any, shall not spread
over more than twelve hours on any day". However, on a sample review of attendance records of
workers for the month of April for contractual workers, it was noted that there were 24 exceptions
wherein workers have worked more than 16 hours up to 23 hours a day.
Management explained to the auditors that this has been the practice in the area in which the
company is operating. Further the management also told that they will review the working schedule
of workers and ensure the compliance with the requirement, ensure that weekly offs and extended
hours of labour will be as per legal requirements.
Please suggest the internal auditors in respect of this matter.
(a) This is a good recommendation by the internal auditors which the management plans to implement.
However, it should not be reported as on observation.
(b) If the management agrees to implement the corrective action by the current financial year end, internal
auditor should not report this matter in his report.
(c) Internal auditor observation should be reported in his report along with management comments.
(d) Internal auditor should look at the significance of this matter and looking at that can ignore this point.
141 P Ltd. has around 15 branch offices and all the branch offices were on company’s own land and
building. Policy of the company is that all the original title deeds for land and building owned by the
company will be kept in the custody of authorised official at company’s head office and a certified
copy of the same is kept with the respective branch for verification.
You have been appointed as the internal auditor for the branches of the company and during the
course of audit you observed that the original title deeds of some of the branch office are kept in the
branch under the custody of branch officials itself. What action will you take in such case?
(a) No action required as it is not a material discrepancy.
(b) Inform the internal auditor of the Head Office for the compliance of policy of the company.
(c) Report the matter in the Internal Audit Report and check for the compliance of the same in the next
audit period.
(d) Ask the official of branch office to send original title deed to the authorised official at Head Office of the
company immediately and submit the Internal Audit Report once the confirmation received from Head
Office of company. [MTP-March 19]
142 ABC Ltd. has a business of pharmaceuticals and has an annual turnover of ₹1,500 crores. During the
last few years, considering the environment in which the company operates, its profit has reduced
and is still falling. Hence the management has been looking at various ways to cut the costs.
PQR & Associates are the statutory auditors of the company and XYZ & Co. are the internal auditors
of the company.
Initially the company did not want to appoint any internal auditors to save costs, however, at
insistence of the statutory auditors, the company appointed the internal auditors.
During the course of the statutory audit for the financial year ended 31 March, 2023, the statutory
auditors requested for the detailed working papers of the internal auditors which the internal

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auditors refused. However, the statutory auditors told the management if the same are not provided
then they would qualify their report.
In this situation, please advise which of the following would be correct.
(a) The statutory auditors should review the detailed working papers but they cannot qualify their report
on this ground.
(b) The statutory auditors may review the detailed working papers and even after that they may qualify
their report.
(c) The statutory auditors are not required to go to the extent of review of detailed working papers of
internal auditors.
(d) The statutory auditors may review the detailed working papers of internal auditors but for that
purpose they would require prior approval of the ICAI. [MTP-Oct. 19]
143 M/s Viaan Viraj & associates are the statutory auditors of ABC Ltd. for the FY 2022-23. The company
has a strong internal audit team. During the course of audit, CA Viaan, the engagement partner found
that the company has factories all across the country. In order to verify the wages expenses at all the
factories, CA Viaan decided to use the Internal Audit Team of the company. He accordingly discussed
the same with Mr. Gaurank, the Chief Internal Auditor of ABC Ltd. to provide him a report on the
wages expenses across all factories. Which of the following requirements as per SA 610 are required
to be fulfilled by CA Viaan prior to using the direct assistance of the Internal Audit Team of the
company?
(a) CA Viaan should obtain written agreement from the management of ABC Ltd. that the internal audit
team will be allowed to follow the statutory auditors’ instructions.
(b) CA Viaan should obtain written agreement from Mr. Gaurank that his team will keep the matters
confidential.
(c) Both (a) & (b).
(d) CA Viaan can use the direct assistance of the Internal Audit Team after discussing the same with the
management. No prior written agreement is required. [MTP-Oct. 20]

Chapter – 14: Management and Operational Audit

144 Strong Steel Ltd. has reported a higher turnover of ₹650 crore in the year 2022-23 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 department 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?
(i) Because the management is not satisfied with the performance of the internal audit
department.
(ii) As the operational audit will be done by an independent person and will provide suggestions for
improvement.
(iii) Because operational audit is qualitative in nature and will analyse all aspects of operations as
per management policies, objectives and goals.
(iv) Because internal audit is restricted to financial accounting and internal controls only.

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(a) (i) only.
(b) (ii) & (iii) only.
(c) (ii), (iii) & (iv) only.
(d) (i), (ii), (iii) & (iv).
145 Employees of ABC Ltd. have to travel frequently for business purposes, so the company entered into a
contract with a Travels Plan Ltd. for managing booking, cancellation and other services required by
their employees. As per contract terms, Travels Plan Ltd. has to raise its monthly bills for the tickets
booked or cancelled during the period and the same are paid by ABC Ltd. within 15 days of the bill
date. The bills raised by Travels Plan were of huge amount, so the management of ABC 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?
(a) Internal audit, as it relates to examine the operational efficiency of the organisation.
(b) Management audit, as it is an audit desired by the management.
(c) Performance audit so as to assess the performance of the Simon travels appointed by the organisation.
(d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the Simon travels for the organisation.
[MTP-Oct. 19, March 22, Oct. 22]
146 What is the difference between management audit and operational audit?
(a) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’, whereas
Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit of Management’.
(b) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit for Management’, whereas
Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’.
(c) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’, whereas
Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’.
(d) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’, whereas
Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit for Management’.
[MTP-May 20, Nov. 21]

Chapter – 15: Audit under Fiscal Laws

147 AV Ltd. is in the business of manufacturing of chemicals and has a net worth of INR 700 crore. The
company has been preparing its financial statements as per Ind AS. For the purpose of Form 3CD,
management did not identify any items which may require adjustments because of the differences
between Ind AS and ICDS. However, the tax auditors during the course of their audit identified few
items where adjustments are required to be made and accordingly, should be reported under Clause
13(e) of Form 3CD.
Further tax auditors also are of the view that disclosures in respect of ICDS should be made in Clause
13(f) of Form 3CD which the management has not done. In this case, please suggest which of the
following would be the correct option.
(a) If the impact of the adjustments related to ICDS identified by the auditors is material then such
adjustments need to be reported in Form 3CD. And disclosures in respect of ICDS should in any case be
given in Form 3CD.

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(b) If the impact of the adjustments related to ICDS identified by the auditors is immaterial even then such
adjustments need to be reported in Form 3CD. To give disclosures in respect of ICDS is the management
choice.
(c) Both the impact of the adjustments related to ICDS identified by the auditors, whether material or
immaterial, and disclosures need to be mandatorily reported in Form 3CD.
(d) ICDS and Ind AS don’t have any differences and hence assessment of the auditor doesn’t seem to be
correct. Hence no reporting would be required under Clause 13(e) of Form 3CD. If there is no reporting
under Clause 13(e) then reporting under Clause 13(f) would also not be required in Form 3CD.
148 OSK Ltd. was incorporated on 15 February 2022. The company choose to prepare its financial
statements for the purposes of Companies Act, 2013 for the period from 15 February 2022 to 31
March 2023 as its first reporting period. The company had a turnover of INR 6 crore for the period
ended 31 March 2022 which is expected to increase to INR 50 crore for the period from 1 April 2022
to 31 March 2023. The company filed its income tax return for the financial year 31 March 2022
before 30 September 2022 i.e. before the due date of filing return of income for the financial year
2021-22 (before considering any extension). The company would prepare its financial statements for
the period from 15 February 2022 to 31 March 2023 and would get them audited from its statutory
auditors.
In this case, please suggest which of the following would be correct.
(a) The company would be exempt from tax audit for FY 2021-22. For 2022-23, the company would need
Form 3CB under tax audit.
(b) The company would be covered under tax audit for the FY 2021-22 and 2022-23. It would need Form
3CA for both these years.
(c) The company would be covered under tax audit for the FY 2021-22 and 2022-23. It would need Form
3CB for both these years.
(d) The company would be covered under tax audit for the FY 2021-22 and 2022-23. It would need Form
3CB for FY 2021-22 and Form 3CA for FY 2022-23.
149 MNC Ltd., India is subsidiary of MNC Inc, US. LLP & Associates has been appointed by MNC Ltd. For
audit of statutory financial statements. MNP & Associates has been appointed as the auditors of the
Reporting package of MNC Ltd. prepared for the year ended 31 March which is required for
consolidation purposes. MNP & Associates are also the tax auditors of MNC Ltd. What should be format
for reporting of MNP & Associates on Form 3CD of MNC Ltd.?
(a) MNC Ltd. should report as per the internal formats of the firm.
(b) MNC Ltd. should report as per the formats issued as per ICDS (Income Computation and Disclosure
Standards).
(c) MNC Ltd. should report as per Form 3CB.
(d) MNC Ltd. should report as per Form 3CA. [MTP-April 19]
150 RK & Associates are the tax auditors of OPQ Pvt Ltd. While performing procedures in respect of clause
21(d) of Form 3CD, the tax auditors came across various payment vouchers where the cash paid
exceeds INR 50,000 during a day. The tax auditors want the management to report all of these
payments in Form 3CD, however, the management has a different view. The management said that the
payment voucher is one for various payments made during a day to various/same parties but any
payments made to various parties or all payments taken together during a day to a single party do not
exceed the criteria for reporting under clause 21(d) of Form 3CD. Please suggest how would you deal
with this matter as tax auditor.

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(a) Since the payment in a single voucher exceeds the prescribed limit it should be reported in Form 3CD
otherwise the tax auditor should report this in his tax audit report.
(b) Since the payment in a single voucher exceeds the prescribed limit it should be reported in Form 3CD.
Tax auditor should qualify his report and send a written communication about this matter to Income
Tax Department.
(c) None of the payment to a single party during a day exceeds the prescribed limit, thus, it should not be
reported in Form 3CD.
(d) Since the payment in a single voucher exceeds the prescribed limit it should be reported in Form 3CD.
However, tax auditor may ignore this if the amount is immaterial, however, he should insist the
management to give a disclosure of the same in Form 3CD and should emphasize the same point in his
tax audit report. [MTP-May 20]
151 Mr. KTK, was an employee of Youths Ltd., a company engaged in the business of electronics goods;
who retired from his service on 30th September, 2021. As he is an electronic Engineer by profession,
on 27th October, 2021 he started a retail business dealing in Electronic items under the name KTK
Traders, a proprietary concern, in his hometown. Mr. KTK provides you the following information
regarding the turnover of his proprietary concern for the financial year ended 31 March, 2023:
Date Particulars Amount
From 1-4-2022 Gross Turnover 1.25 crore
to 31-3-2023
25-5-2022 Less: Goods returned (sales made during financial year 2021-2022) 0.08 crore
12-11-2022 Less: Cash discount allowed 0.05 crore
30-12-2022 Less: Goods returned (sales made on 10-12-2021) 0.11 crore
15-2-2023 Less: Discount allowed in the sales invoice 0.03 crore
31-3-2023 Less: Commission on sales 0.01 crore
Net sales 0.97 crore
As per section 44AB of the Income-tax Act, 1961, every person carrying on business shall, if his total
sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees
in any previous year, get his accounts audited by an accountant before the specified date.
Considering the above, which of the following shall be considered as a reason for applicability or non-
applicability of tax audit under section 44AB of the Income-tax Act, 1961.
(a) Tax audit under section 44AB of the Income-tax Act, 1961 shall be applicable as it is having an effective
turnover of ₹ 1.25 crore, which is more than the limit prescribed.
(b) Tax audit under section 44AB of the Income-tax Act, 1961 shall be applicable as it is having an effective
turnover of ₹ 1.03 crore, which is more than the limit prescribed.
(c) Tax audit under section 44AB of the Income-tax Act, 1961 shall not be applicable as it is having an
effective turnover of ₹ 0.97 crore, which is less than the limit prescribed.
(d) Tax audit under section 44AB of the Income-tax Act, 1961 shall not be applicable as it is having an
effective turnover of ₹ 0.98 crore, which is less than the limit prescribed. [MTP-Oct. 20]
152 For the year ending 31st March 2023, Sabka Vikas & Sons has made a claim for refund of custom duty
for ₹ 2 crore but such refund was as admitted as due by authority in April 2023. Sabka Vikas & Sons
neither credited the claim in Profit and Loss account nor reported the same in clause 16 of Form 3CD.

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Part I – Multiple Choice Questions
Can you please guide the auditor of Sabka Vikas & Sons for reporting of refund of custom duty in
accordance with clause 16 of Form 3CD?
(a) Refund of custom duty to the extent of ₹ 2 crore should be reported in clause 16 as the same is admitted
by the custom authorities.
(b) Refund of custom duty to the extent of ₹ 2 crore need not be reported in clause 16 as it is admitted by
custom authorities in the next financial year.
(c) No disclosure is required as refund of custom duties is not covered under clause 16.
(d) Auditor should take a written representation from the management stating that refund of custom duty
of ₹ 2 crore will be credited to profit and loss account for the financial year ending 31st March 2022 and
thus, no reporting is required. [MTP-March 21]
153 M/s. ASH Brothers is a partnership firm engaged in the business of selling old vehicles. Mr. A, Mr. S
and Mr. H are the three partners of the firm. In the month of January 2022, Mr. H’s son (a minor) was
admitted for the benefit of partnership who attained majority in April 2023, but no change was made
in the Partner’s share during the year. Whether the tax auditor is required to mention the details of
Mr. H’s son admitted to the partnership during the year, as per clause 9 of Form3CD of the Income
Tax?
(a) Since the minor has not attained majority during the audit period, no details need to mention in Form
3CD.
(b) The auditor is not required to give details of minor admitted to partnership as there was no change in
the Partner’s Share during the year.
(c) Any change in the Partners since the last date of the preceding year has to be mentioned under clause
9(b) of Form 3CD.
(d) As the father of minor is his guardian till he attains majority and Mr. H was already partner in the firm,
there is no need to mention the details of minor in Form 3CD. [MTP-March 22]

Chapter – 16: Investigation, Due Diligence and Forensic Audit

154 IMIR Inc is a major technology, engineering, manufacturing and financial services conglomerate, with
global operations having its registered office in US. The Company’s manufacturing footprint extends
across eight countries in addition to US. It has several international offices and a supply chain that
extends around the globe.
HIN Private Limited is a medium-sized Fast-Moving Electrical Goods (FMEG) company and is also
involved in power distribution equipment manufacturing. This company is based in India and enjoys
a good market share in a wide spectrum of products like Industrial & Domestic Circuit Protection
Devices, Cables & Wires, Fans, Commercial and Industrial Applications.
IMIR Inc. (Acquirer) is currently in talks to acquire HIN Pvt. Ltd (Target). The initial price has been
agreed for the acquisition of business based on net worth and profitability of the target company
with an assumption that all contingent liabilities of the target company impacting its future business
have been considered. The acquirer appointed a firm to carry out the financial due diligence review
of the target company and advised that the firm should strictly work as per the scope.
The firm during the course of its review found some show-cause notices (which have not matured
into demands) being issued against the target company. The firm also found that there could be a
potential high value labour claim which may arise out of the negotiation which was ongoing between
the target company and the labour union and the labour wage agreement has already expired.

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The firm discussed all these matters with the management of the target company. The target
company confirmed that these matters are under discussion and was confident that these matters
would not result into any liability and hence it did not consider the same in the initial price. The firm
after its discussion with the target company reported these matters to the acquirer.
In the given situation, please suggest which one of the following should be correct?
(a) In the given case, the initial price between the target and the acquirer is already set which includes the
impact of contingent liabilities. Hence the above-mentioned matters relating to show cause notice and
labour claim should be ignored by the firm.
(b) In the given case, the initial price between the target and the acquirer is already set which includes the
impact of contingent liabilities. However, since these matters have not been considered by the target
company in the initial price, it would be appropriate to consider the impact of matter related to labour
claim as that may result in liability in future but the matter related to show-cause notice should be
ignored by the firm.
(c) In the given case, the firm has gone beyond its scope of financial due diligence review. Financial due
diligence review covers review of trading results, assets and liabilities and accounting policies and
practices of the target company. The management of the target company should talk to acquirer so that
the acquirer can ask the firm to limit its work as per the scope agreed.
(d) In the given case, even though the initial price between the target company and the acquirer is already
set but still the firm needs to look at any hidden liabilities which may arise in the two cases – show
cause notices and labour claim. Accordingly, the firm has done the right thing by reporting these
matters to the acquirer.
155 Sound Systems is a partnership firm and is in existence for the last 15 years. The firm is engaged in
consultancy business related to various areas and has built a good name for itself over the period.
Some of the clients of the firm are very old who have been continuing since its existence. The
business of the firm has gone through various phases some of them were very bad. But currently the
business is going very well and the firm is looking to expand its operations into different
geographies. For this, the firm’s management decided that some of its senior partners will move to
new offices and new partners would be inducted.
A team of new partners is in discussion with the senior old partners regarding their joining the firm.
The new partners would be interested to know whether the terms offered to them are reasonable
having regard to the nature of the business, profit records, capital distribution, personal capacity of
the existing partners, socio-economic setting etc. and whether they would be able to derive
continuing benefits in the shape of return of capital to be contributed and remuneration of services
to be offered. In addition, they also want to ascertain whether the capital to be contributed by them
would be safe and applied usefully or not.
For this purpose, an investigation of the business of the firm was set up on behalf of these new
partners.
At the time of scrutiny of the record of profitability of the firm’s business, the investigating
accountant picked up records of last 4-5 years wherein he observed 2 years which were unusual
because the profits during those 2 years were highly erratic and fluctuating. The investigating
accountant, therefore, went into the profits of last 7-8 years to iron out the fluctuation. He also
examined the provisions of the partnership deed particularly the composition of partners, their
capital contribution, drawing rights, retirement benefits and goodwill. He also asked for details of
jobs/contracts in hand and the range of current clientele of the firm for his examination. Some of
these procedures of the investigating accountant were not found appropriate by the senior partners

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Part I – Multiple Choice Questions
of the firm and they advised the investigating accountant not to go beyond his scope. In the given
situation, which of the following is correct:
(a) The investigating accountant should not have asked for the records of the profits of last 7-8 years as
that would be too much of the information for his review. Also, the details of jobs/contracts in hand and
the range of current clientele of the firm are confidential and hence does not get covered in his scope.
(b) After finding 2 years which were unusual because the profits during those 2 years were highly erratic
and fluctuating, the investigating accountant should have reported the matter to the new partners
instead of asking for more details related to the profits of last 7-8 years. Also, he is not required to
examine the provisions of the partnership deed as these details would have already been discussed
with the new partners and they would have checked that.
(c) The procedures of the investigating accountant look completely reasonable considering his scope of
work. Further, no changes are required in his work approach.
(d) At the outset, it can be said that investigation in the given case was not required. However, even if the
new partners decided to carry out the investigation it should have been limited to mainly inquiry
procedures by the investigating accountant. The investigating accountant could have also reviewed the
manner of computation of goodwill which doesn’t seem to have been performed on the basis of the
abovementioned facts. [MTP-Oct. 19]
156 While investigating the matters relating to possible misappropriation of cash, cashier says that
everyday cash is counted and reviewed by the Finance Head. Your specimen review indicates that
daily cash summary was not signed off by the Finance Head. In this situation you should:
(a) Conclude that cashier is not telling truth.
(b) Consider extending investigation procedures like corroborative enquiry with Finance Head, review of
appropriate daily cash summaries etc.
(c) Conclude that Finance Head is not a responsible person.
(d) Conclude that daily cash summary is not relevant for investigation. [MTP-May 20]
157 In accordance with provisions of Companies Act, 2013 with respect to investigation into the affairs of
a company, who can be appointed as an inspector?
I. Raj & Associates, a firm
II. CA Rahul
III. Mihim Pvt. Ltd, a body corporate
IV. ABC & Partners LLP, a body corporate
(a) I, III & IV
(b) I only
(c) III & IV
(d) II only [MTP-Oct. 20]
158 Bhagwan & Co. has received an order in writing from the Central Government, in respect of one of its
clients, to carry out an investigation under section 210 of the Companies Act, 2013. During the course
of carrying out investigation as above, Bhagwan & Co. requires certain evidence from a place outside
India in order to establish the correctness of an investment in the shares of a company outside India.
What should be the procedure of Bhagwan & Co. to seek evidence from outside India for the
investigation?
(a) Seeking evidence from outside India for investment in shares outside India is outside the scope of
investigation.
(b) An application is to be made to the competent court in India by the inspector and such court may issue
a letter of request to a court or an authority in such country for seeking evidence.

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(c) The evidence can be sought by electronic mail by writing to the concerned authorities of the entity
outside India.
(d) Powers of seeking evidence outside India is available only to an investigator under section 212 -Serious
Fraud Investigation. [MTP-April 22]
159 Which among the following are the skills to be possessed by M/s ABC & Associates as forensic
accountants?
(a) Criminology and evidence gathering.
(b) Confidence and curiosity.
(c) Discretion and creativity.
(d) Inquisitiveness and persistence. [RTP-May 22, MTP-April 23]
160 ABC & Co. were appointed to conduct a forensic audit of XYZ Limited. After successfully conducting
the forensic audit, ABC & Co. prepared its report for the appointing authority. A copy of the report
was also shared with the Board of Directors of the company. In the report, Forensic Auditors
enumerated the findings of the investigation, including a summary of the evidence, a conclusion as to
the amount of loss suffered as a result of the fraud and identification of those involved in fraud. The
report also covered sections on the nature of the assignment, scope of the investigation, approach
utilized, limitations of scope and opinions. Upon receiving the report, the Board of Directors raised
objections as to how forensic auditors can mention the names of those who are involved in fraud.
You as a Forensic Expert guide whether is it appropriate to mention the details of the person who are
involved in fraud in the final report.
(a) Report can include a section to identify those involved in fraud. This is recommendatory and in line
with the appropriate practice of reporting.
(b) Report should not contain such details till the time it is proved in a court of law.
(c) Report can include a section to identify those involved in fraud but subject to prior approval of the
Board of Directors of the company.
(d) Report should not include a section to identify those involved in fraud as it is not permitted under SA
700. [MTP-Sep. 22]
161 JIN Ltd. which is based in Mumbai, is in the business of manufacturing leather products since 1995
and wants to acquire OM Leathers Private Limited, which is based in Pune and engaged in the
business of selling leather products manufactured by different companies. Before acquisition JIN Ltd.
wants to get a due diligence review to be done of OM Leathers. JIN Ltd. appointed S & S Associates for
conducting overall due diligence of OM Leathers. During review, the accountant asked OM Leathers
to provide financial projections of the company for next five years, but OM leathers refused to
provide the same and claimed that financial projections are not part of due diligence review.
Whether the objection raised by the management of OM Leathers is correct? Give reason.
(a) The objection raised by OM Leathers is correct, as due diligence doesn’t include review of financial
projections.
(b) The objection raised by OM Leathers is not correct, as due diligence refers to an examination of a
potential investment to confirm all material facts of the prospective business which a company wants
to acquire and financial projection is a part of same.
(c) The objection raised by OM Leathers is correct, as reviewer cannot comment on financial projections in
his report.
(d) The objection raised by OM Leathers is not correct, as the target company cannot refuse in providing
any information required by the reviewer. [MTP-Oct. 22]

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Part I – Multiple Choice Questions
Chapter – 17: Peer Review and Quality Review

162 Vishnu & Associates is a large firm of Chartered Accountants. During the financial year ended 31
March 2023, the firm got an intimation for the peer review on 15 July 2022. The process of peer
review got started and completed on 10 September 2022 which included the on-site review from 1
August 2022 to 16 August 2022.
Vishnu & Associates objected to the time taken by the Peer Reviewer on-site, however, as per Peer
Reviewer, the entire review process got completed within 60 days from the date of notifying the firm
about its selection for review. Please advise.
(a) The review should be completed within 30 days.
(b) The time for on-site review should not have extended beyond 10 working days.
(c) The review should be completed within 45 days.
(d) The time for on-site review should not have extended beyond 7 working days. [RTP-Nov. 19]
163 Vishnu & Associates is a large firm of Chartered Accountants. During the financial year ended 31
March 2023, the firm got an intimation for the peer review on 1 July 2022.
The entire peer review process including on-site review got completed. The peer reviewer did not
share any of his observations with Vishnu & Associates as draft and final report was submitted to the
firm.
(a) Peer reviewer need not share any draft report with the firm if there are no observations.
(b) Even the final report is not required to be submitted to the firm.
(c) Peer reviewer needs to share draft report with the firm before finalisation.
(d) There are no reports in case of peer review. On completion, a certificate to that effect is issued.
[MTP-Oct.19]
164 MMH & Co., is a large firm of Chartered Accountants having 10 partners and 7 branches across India.
The firm had undertaken Statutory Audit of the branches of some insurance companies and public
sector banks. They were also the Central Statutory Auditors of a major Private Sector Bank in South
India. On 1st September, 2022, the firm got an intimation from Peer Review Board (‘Board’)
regarding the peer review of the firm. The Board recommended some names of reviewers. The
practice unit, MMH & Co (‘Firm’), selected CA. R and intimated the name to the Board. CA. R along
with his qualified assistant did an on-site review. The Firm was not happy with the preliminary
report issued by the reviewer arguing that the findings of the reviewer were baseless. The managing
Partner of the firm wrote a letter to the Peer review Board doubting the eligibility of the reviewer.
In this backdrop, you are required to advise on the following matter.
(a) A Peer Reviewer shall be a Chartered Accountant having at least 5 years of Audit experience.
(b) A Peer Reviewer shall be a Chartered Accountant having at least 7 years of Audit experience.
(c) A Peer Reviewer shall be a Chartered Accountant having at least 10 years of Audit experience.
(d) A Peer Reviewer shall be a Chartered Accountant having at least 15 years of Audit experience.
[MTP-Oct.20]
165 Mr Q, a peer reviewer appointed for the firm ABC & Co. for the period under review starting from
2020-21 to 2022-23 decided to select 5 samples of audit engagement. All samples were appropriate,
and no deviations or issues were identified in the review with respect to those samples. Post that, Mr.
Q reviewed the training & development program for the staff, article assistant and other assistant
and he found that the training and development program were not appropriate and rather outdated.

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The staff, article assistant and other assistant placed on the audits were not trained related to the
specific matters of the industries to which the audit client belonged. As a result, the peer reviewer
included a comment in the preliminary report regarding training programmes for staff (including
articled assistant and other audit assistants) concerned with assurance functions, including
availability of appropriate infrastructure. Upon receiving such preliminary report, the Practice Unit
raised concerns that the said comment of peer reviewer is related to the matter which is out of scope
of the peer review.
Kindly decide whether the comment of peer reviewer on the training programmes for staff
(including articled assistants and other audit assistants) concerned with assurance functions is
within the scope of peer review or not?
(a) The Review shall only cover Compliance with Technical, Professional and Ethical Standards, Quality of
reporting, Systems and procedures for carrying out assurance services, Compliance with directions
and/or guidelines issued by the Council to the Members and Compliance with directions and/or
guidelines issued by the Council in relating to article assistants and or audit assistants. Hence the
comment of peer reviewer on the training programmes for staff (including articled and other
assistants) concerned with assurance functions is not within the scope of peer review.
(b) The Statement defines the scope of peer review which revolves around compliance with technical,
ethical and professional standards; quality of reporting; office systems and procedures with regard to
compliance of assurance engagements; and, training programmes for staff including articled and audit
assistants involved in assurance engagements. Hence the comment of peer reviewer on the training
programmes for staff (including articled and other assistants) concerned with assurance functions is
within the scope of peer review.
(c) The Statement of Peer Review makes it clear that the peer review, "does not seek to redefine the scope
and authority of the Technical, Professional and Ethical Standards specified by the Council but seeks to
enforce them within the parameters prescribed by the Technical Standards but only seeks to ensure
that they are implemented, both in letter and spirit. Therefore, it is evident that the scope of peer
review is restricted to the compliance Technical, Professional and Ethical Standards.
(d) The scope of Peer Review is decided by the Practice Unit and Peer Reviewer Mutually and hence if the
Practice Unit is contending that it is out of scope then it should be considered as out of scope.
[MTP-Nov.21]
166 As per the Quality Review Board, the term technical standards in the context of Chartered
Accountants Rules, 2006, includes which among the following?
(a) ICDS notified under Income-tax Act, 1961.
(b) Accounting standards notified under Companies Act, 2013.
(c) Guidance notes on accounting and auditing matters issued by C&AG.
(d) Notifications/Directions issued on accounting and auditing matters issued by RBI/SEBI/other
regulatory bodies. [RTP-May 22, MTP-April 23]
167 In case of peer review, which among the following the review shall covered?
(a) Compliance with legal regulations governing the firm
(b) Check whether the qualification of the articled assistants and other staffs are sufficient to be employed
(c) Compliance with tax regulations of the firm, which includes filing IT return of the firm, payment of tax,
etc.
(d) Training program for staff concerned with assurance function, including availability of infrastructure.
[RTP-Nov.22]

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Part I – Multiple Choice Questions
Chapter – 18: Audit of Banks

168 You are the internal auditor of FCD Bank Limited for the year 2022-23 and the bank maintains all the
data on computer. You are instructed by your senior to verify the loan against fixed deposits of the
Navi Mumbai branch. As per the scope of audit, you need to ensure that proper lien has been marked
on all the fixed deposits against which loan has been issued. Which of the following procedure you
will follow for the same:
(a) Ensure that all the fixed deposit receipts are attached along with the approved loan documents.
(b) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged in
favour of bank and check that the lien is marked in the computer software.
(c) Discuss the process followed for lien marking with the branch manager.
(d) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged in
favour of bank, check that the lien is marked in the computer software and the fixed deposit should be
kept separately with the branch manager. [MTP-April 23]
169 Your firm has been appointed statutory auditor by a Nationalised Bank for the year 2022-23. Your
senior advised you to check all the standard assets shown in the balance sheet as on 31st March
2023. While verifying you observed that one of the accounts was regularised on 28th March 2023, for
which the interest and instalment amount was overdue from the quarter ending 30th September
2022. The account was regularised after the repayment of overdue interest and instalment amounts
was done on 26th March 2023. Only the last day of the financial year was reckoned as the date of
account becoming NPA by the Bank. As a statutory auditor will you agree with the Bank’s policy?
(a) As the interest charged in the account was overdue for more than 90 days from the end of quarter, it
should be classified as NPA and should be considered as sub-standard asset for the balance sheet as on
31st March 2023.
(b) As the overdue interest and instalment amount was paid before the balance sheet date there is no
reason to classify the account as NPA.
(c) The auditor should not agree with the Bank’s policy to regularise the account before balance sheet date
as overdue interest indicates more than normal risk attached to the business.
(d) Bank can regularise the account before balance sheet date but should ensure that the amount has been
paid through genuine resources and not by sanction of additional facilities, and the account remains in
order subsequently.
170 XYZ bank had an NPA account of M/s. Glenpark showing recoverable amount of ₹ 55 lakh in the
books. It sold the NPA for ₹ 56 lakh. Please select as to which of the following options is the correct
accounting:
(a) Credit the excess of ₹ 1 lakh to profit on sale of assets.
(b) Let the amount remain in Glenpark account.
(c) Credit the excess of ₹ 1 lakh to Provision for loss on sale of NPAs.
(d) Return ₹ 1 lakh to the party purchasing the NPA. [RTP-May 23]
171 PFS Bank was engaged in the business of providing Portfolio Management Services to its customers,
for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of
the Bank’s financial statements for the year 2022-23. Your senior has instructed you to verify the
transactions of Portfolio Management Services (PMS). While verifying the transactions you noticed

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that the bank has not prepared separate record for PMS transactions from the Bank’s own
investments. As a statutory auditor what will be your decision for verification of PMS transactions?
(a) It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so the
auditor can verify the PMS transactions as part of investment verification for Bank’s financial
statements and submit the audit report accordingly.
(b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and the
auditors are required to give a certificate separately for the same. So, in the above case the auditor
should not verify the PMS transactions till the Bank segregates the transactions from its own
investments.
(c) The auditor can give a qualified opinion in his audit report on the financial statements of the Bank and
report the matter in special purpose certificate.
(d) Auditor should verify that PMS funds are not utilised for lending, inter-bank deposits or deposits to
corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded
separately or not will not matter for the auditor. [MTP-Oct. 19]
172 The MEA Bank Ltd. has sanctioned overdraft limit of ₹ 34 crore to Bharat Ltd. on the working capital
of the company as on 31st March 2021. As per bank norms the drawing power in the overdraft
account need to be reviewed on quarterly basis as per the audited stock statement of the company.
As a central statutory auditor for the year 2022-23, while verifying the advances for the year ending
31st March 2023, you noticed that the bank has not obtained the stock statement of Bharat Ltd. for
the two quarters ending 31st December, 2022 and 31st March, 2023 and no provision of NPA has
been made for this account in the financial statements for the year 2022-23. What will be your
decision as a central statutory auditor?
(a) Classify the borrower’s account as NPA as the borrower’s financial position cannot be determined due
to non-submission of stock statement.
(b) Instruct the bank to obtain the audited stock statement for both the quarters and review the credit
limit accordingly.
(c) As per bank norms the drawing power need to be determined on the basis of stock statement and it
was more than three months old as on 31st March, 2023, so the outstanding in the account will be
deemed as irregular.
(d) You should give a qualificatory note in the audit report as per SA 700. [MTP-May 20, March 23]
173 A bank has some non-interest-bearing staff advances. In the Balance Sheet these should be presented
under:
(a) ‘Term loans’ under ‘Advances’.
(b) ‘Cash Credits, Overdrafts and Loans Repayable on Demand’ under ‘Advances’.
(c) ‘Advances in India – Others’ under ‘Advances’ Schedule.
(d) ‘Others’ under ‘Other assets. [MTP-March 21]
174 While examining the computation of Demand and Time liabilities which of the following is to be
included in liabilities:
(a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of
recovery.
(b) Amounts received in Indian Currency against import bills and held in sundry deposits pending receipts
of final rates.
(c) Net credit balance in branch adjustment accounts including these relating to foreign branches.
(d) Margins held and kept in sundry deposits for funded facilities. [MTP-April 21, April 22]

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175 Siddha and Associates, Chartered Accountants has been appointed as the branch statutory auditor of
CRR Bank. Auditor identified cases of Advances where primary security is not adequate to cover the
margin as stipulated by the Loan covenants. Further no documentation exists to confirm that the
collateral security is unencumbered. For the advances not having adequate security, the auditor
should:
(a) Mention the cases in the Long Form Audit report only.
(b) Not mention the cases in the Long Form Audit report.
(c) Document the cases and discuss with branch management.
(d) Consider to downgrade the asset as per RBI prudential norms. [MTP-Oct. 21]
176 A branch of ABC Bank was having three staff i.e., one cashier, one officer and one manager. The
cashier was responsible for the signing of cash slips, passing entries for cash withdrawals and
providing cash to customers. You as a Bank’s branch Auditor decided to verify the cash withdrawal
transactions and after testing you decided to pass the control over the cash process. Also, there were
no observations identified during the testing. Moreover, as the process is present in the branch, work
performed by the cashier is not monitored on daily basis. However, on a quarterly basis, certain test
checks are performed by an officer of the branch. Internal Audit team reported the said controls over
process as operating. You are required to guide whether reporting of the said controls by Internal
Audit Team is correct or not:
(a) The controls over the cash process should be reported as operating because no issues were identified
during the testing of controls.
(b) The controls over the cash process should be reported operating as test checks are being performed by
officers on a quarterly basis.
(c) This control should be reported as non-operating because segregation of duties was not present with
respect to the processing of payment transactions by the cashier.
(d) This control should be reported as non-operating as the manager of the branch should have at least 2
officers for test checks of cash transactions and for cash process. [MTP-Sep.22]
177 Which of the following statements is INCORRECT?
(a) Inoperative saving and current accounts are a fraud prone area.
(b) Debit balances in current account are reduced from aggregate demand deposits in balance sheet of a
bank.
(c) Interest accrued but not due on deposits is shown separately under head “Other Liabilities and
provisions.”
(d) FCNR deposits are in designated foreign currencies only [MTP-Sep. 22]
178 Which of the following statements is correct regarding submission of Statutory branch audit report
and LFAR of branch signed by the branch Auditor CA. Mahaveer?
(a) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
submitted to head office of bank directly.
(b) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
submitted to RBI directly.
(c) Statutory branch audit report as well as LFAR are to be submitted to Statutory Central auditors.
(d) Statutory branch audit report as well as LFAR are to be submitted to head office directly as
appointment was made by Head office. [MTP-Oct. 22]

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Chapter – 19: Audit of NBFC

179 RCE Ltd. was set up under the Companies Act, 2013 and got itself registered as non-banking financial
company with the Reserve Bank of India, fulfilling the required criteria. During the financial year
ended 31 March 2023, the company’s operations have started. The company’s total assets were ₹ 298
crore out of which trade receivables, loans receivable in cash, cash and bank balances comprised of
₹ 199 crore. During the financial year ended 31 March 2023, the company’s operations generated
total income of ₹ 99.50 crore. The management also did an assessment and observed that income
from its financial assets was not much during the year and amounted to only ₹ 60 crore. The
management is looking at various alternatives to improve its operations, if required, to generate
better income in the coming years.
Further, the company during the year also accepted and gave demand deposits which have been very
efficient for the company. Management has a plan to significantly increase these deposits in the next
2 years as that would help in the overall functioning of the company.
In the context of the above, please answer which of the following options would be correct.
(a) The company does not meet the criteria of financial assets and hence would not be considered as NBFC.
Further, it cannot accept and give demand deposits and the same thing should be reported by the
statutory auditors of the company.
(b) The company does not meet the criteria of income and hence would not be considered as NBFC.
Further, it cannot accept and give demand deposits and the same thing should be reported by the
statutory auditors of the company.
(c) The company meets the criteria of financial assets and income. An NBFC can only accept demand
deposits but cannot give demand deposits. Hence in this case, the statutory auditors should report
regarding the same.
(d) The company meets the criteria of financial assets and income. An NBFC can only give demand deposits
but it cannot accept demand deposits. Hence in this case, the statutory auditors should report
regarding this matter.
180 50:50 test determination is popularly used in
(a) Banking Company
(b) Insurance Company
(c) NBFC Company
(d) Stock Trading Company [MTP-Nov. 21, Oct. 22, Sep. 23]
181 MG Ltd. is a NBFC and is duly registered as per the requirements of the RBI. Company is operating for
the last 10 years and assets base has been very strong over the years due to its efficient management
function. The company is also planning to get listed for which required work is going on.
For the financial year ended 31 March, 2023, the company has closed its books of account and
prepared the financial statements for the purpose of statutory audit in a timely manner. The auditors
of the company have started their fieldwork. It has been observed by the auditors that the company’s
various term loans which have been given to various parties have become overdue in terms of
instalment including interest for a period of 5 months. As per the auditors these terms loans should
be considered by the company for making provision at the rate of 20% of total outstanding amount,
however, the management has considered a provision at the rate of 0.30%. Please advise the

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auditors and the management regarding this matter considering that “Non-Banking Financial
Company - Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016” are applicable to this NBFC.
(a) Provision should be made at 10%.
(b) Provision should be made 0.30%.
(c) Provision should be made at 20%.
(d) Provision should be made at 0.40%. [MTP-Oct. 19]

182 M/s. Vardhman and Associates have been appointed as the statutory auditors of a NBFC (UVW Ltd.)
for the financial year 2022-23. The company is required to comply with the Indian Accounting
Standards. During the course of audit CA Vardhman found that the company has classified its Assets
and Liabilities as financial and non-financial instead of current and non-current. What should CA
Vardhman advice the management of NBFC UVW Ltd. in this regard?
(a) The management of NBFC UVW Ltd. is correct in classifying the Balance Sheet items as financial and
non-financial as per requirement of Division III of Schedule III of Companies Act, 2013.
(b) The management of NBFC UVW Ltd. is not correct in this regard and should classify the Balance Sheet
items as current and non-current as is required by all other companies as per the requirement of the
Division III under Schedule III of the Companies Act, 2013.
(c) The management of NBFC UVW Ltd is right in this regard as the NBFC has the option to classify the
balance sheet items either as current and non-current or as financial and non- financial.
(d) The management of NBFC UVW Ltd. should classify the Balance Sheet items as current and non-current
as per the requirement of Division II of Schedule III of the Companies Act, 2013 applicable in case of
NBFC. [MTP-March 22]

183 CA Z is appointed as a Statutory Auditor of JB Finance Limited (a Non- Banking Financial Company
covered under Non-Banking Financial Company — Systematically important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016) for the year 2022-23.
Following information is available with CA Z with respect to JB Finance Limited as at 31st March,
2023:

Particulars ₹ (in Lakh)

Standard Assets 700.00

Sub-standard Assets 200.00
Doubtful Assets (Secured and up-to one year) 10.00
Doubtful Assets (Secured and more than three years) 50.00

What will be the total provision required to be made in the books of JB Finance Limited for the year
ended 31 March, 2023 for the above stated Assets?
(a) ₹ 49.8 Lakh
(b) ₹ 47 Lakh
(c) ₹ 34.8 Lakh
(d) ₹ 52.8 Lakh [RTP-Nov. 22]

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Chapter – 20: Audit of Insurance Business

184 NIC Ltd. is a large company engaged in the business of insurance for the last 9 years. The company
has expanded its business considerably over the years and have set up various divisions across India.
The accounting and the operational systems of the company are centralized wherein the accounts of
all the divisions, trial balances and their balance sheets are prepared by the Head Office. AJ & Co, a
firm of Chartered Accountants, are the statutory auditors of this company and audit all the divisions
and the head office. The auditors have completed the audit of the financial statements of the
company for the year ended 31 March 2023 and the company’s financial statements are approved.
Before the annual general meeting of the company, the company received a notice from the
Insurance Regulatory and Development Authority of India (IRDAI) which has asked the company to
respond within 7 days as to why this company breached the requirement of IRDAI guidelines by
having a single auditor for all the divisions and head office.
The management of the company has been doing this over the years and were never aware of this
requirement. To respond to this, the management has consulted many legal experts and also the
auditors. They would also like to understand your views as to how to respond to IRDAI in this critical
situation. Please advise carefully.
(a) There has been breach of IRDAI guidelines and accordingly the management should respond.
(b) The management can request IRDAI to consider relaxation in respect of this provision for the company
for the current year as relaxation for the same is permissible as per IRDA Guidelines.
(c) The management should respond to IRDAI that this provision is applicable to a company only after 15
years of its existence and hence there is no breach of IRDAI guidelines.
(d) The management should respond to IRDAI that this provision should have been ensured by the
auditors only hence they should not be held liable for this breach of provision of the IRDAI guidelines.
185 BIC Ltd. is an insurance company looking to expand their operations in the Northern India. The
company’s operations have been considerable in the Southern India and its head office is also based
at Chennai.
The company had strong processes and controls from its starting days and have appointed
consultants over the years to ensure their operative effectiveness at various points of time.
Shivam Ltd. exercises significant influence over BIC Ltd. and the financial statements of Shivam Ltd
are prepared as per Ind AS (Indian Accounting Standards) and audited by Shubham & Associates.
Advik & Associates are the statutory auditors of BIC Ltd. For the financial year ended 31 March 2023,
BIC Ltd also requested Advik & Associates to certify the Investment Risk Management Systems and
Processes of BIC Ltd as per discussions with Shivam Ltd. Advik & Associates completed this task and
also submitted the required certificate which the management has submitted to the required
authorities.
After submission, BIC Ltd received notice from the Insurance Regulatory and Development Authority
of India (IRDA) that the company has not complied the provisions in respect of submission of
certificate.
The company discussed this matter with Shivam Ltd. and would also like to have your views on this.
(a) BIC Ltd, being an associate of a company and because of the fact that Ind AS is applicable on Shivam
Ltd, should have appointed another firm of Chartered Accountants along with Advik & Associates for
this certification work.

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(b) BIC Ltd should have got this certification work done from their internal auditors as per the required
provisions of IRDA.
(c) BIC Ltd should not have got this certification work done from their statutory auditors.
(d) The certification work should have been done by Shubham & Associates.
186 ABC Ltd. is engaged in the business of general insurance and is in existence for over 15 years. The
company has a subsidiary company, PIC Ltd., which is also engaged in the business of insurance other
than general insurance.
The previous statutory auditors of PIC Ltd. have completed their tenure as an auditor and
accordingly have resigned and the management of PIC Ltd. is looking for new statutory auditors.
KB & Associates, a firm of Chartered Accountants, have vast experience of audit of insurance
companies and would like to get appointed as auditor of PIC Ltd. KB & Associates is a large firm and
have also employed experts – engineers, valuers, lawyers for various client services. The firm is
evaluating as to what should be the criteria for get appointed as auditors of PIC Ltd. because in the
past, they have audited only the holding companies and considering a subsidiary company for the
first time.
In this context, please help the firm by selecting the correct option. [MTP-Oct. 19]
(a) KB & Associates, a firm of Chartered Accountants, should be appointed by the Board of Directors of PIC
Ltd. and should ensure that they don’t take up audit of more than 2 insurance companies.
(b) KB & Associates can take up the audit if the firm is appointed by the CAG of India and should ensure
that they don’t take up audit of more than 3 insurance companies.
(c) KB & Associates cannot take audit of PIC Ltd. because they have employed experts which is not
permitted by the IRDAI Guidelines.
(d) KB & Associates can take up audit of PIC Ltd. by ensuring that they are eligible to be appointed as per
the criteria laid down in the Companies Act 2013 for audit of subsidiary companies and they would
need to submit a certificate in this respect to the ICAI.
187 Pradyuman & Co. was one of the joint auditors of Lok Sahay Insurance Co. Ltd. Mr. Vicky, one of the
engagement team members, of the said joint auditor, was examining the expenses included in
different accounts.
While verifying the expenses incurred in relation to employees, Mr. Vicky made a list of the same as
follows, which he was going to discuss with his senior: -
Particulars ₹ Included in which account?
Payment of Salaries to employees 100 lakh Employees’ Remuneration and
Welfare Benefits Account
Reimbursement of premium in 20 lakh Employees’ Remuneration and
respect of employees’ health cover Welfare Benefits Account
Training and non-training expenses 30 lakh Employees’ Remuneration and
incurred for employees Welfare Benefits Account
Expenses incurred towards medical 10 lakh Employees’ Remuneration and
treatment of employees not having Welfare Benefits Account
health cover
Incentives paid to employees of the 40 lakh Commission account
company who have solicited
insurance policies

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Whether it can be said that Lok Sahay Insurance Co. Ltd. has properly accounted for the expenses
incurred in relation to employees?
(a) No, reimbursement of premium in respect of employees’ health cover should be included in ‘Others’
account and incentives paid to employees should be included in Employees’ Remuneration and Welfare
Benefits Account.
(b) No, non-training expenses have to be shown separately and incentives paid to employees should be
included in Employees’ Remuneration and Welfare Benefits Account.
(c) No, expenses incurred towards medical treatment of employees not having health cover should be
included in ‘Others’ account and non-training expenses have to be shown separately.
(d) No, training and non-training expenses incurred for employees should be bifurcated and shown
separately and expenses incurred towards medical treatment of employees not having health cover
should be included in ‘Others’ account. [MTP-Oct. 21, RTP May 23]
188 The Splendid General Insurance Company has entered into reinsurance contract with Adi
Reinsurance Co. Ltd. against the risk of fire only. Adi Reinsurance Co. Ltd. is one of the largest
reinsurers in India. Identify the type of reinsurance contract between Splendid General Insurance
Company and Adi Reinsurance Co. Ltd.
(a) Treaty Reinsurance.
(b) Proportional Treaty Reinsurance.
(c) Non-Proportional Treaty Reinsurance.
(d) Facultative Reinsurance. [MTP-Apr. 22]
189 Vishudh & Co. is the auditor of JIN Insurance Company. The insurance company is also involved in
reinsurance business and necessary provision for re-insurance premium has been made in the books
of accounts. The insurance company is into a re-insurance whereby their contract relates to one
particular risk and is expressed in the re-insurance policy. Each transaction is negotiated
individually, and each 4 party has a free choice i.e. for the insurance company to offer and the re-
insurer to accept. What kind of a re-insurance business is the insurance company into?
(a) Facultative Re-insurance.
(b) Stop loss treaty re-insurance.
(c) Auto-fac re-insurance.
(d) Proportional treaty re-insurance. [RTP-May 21; MTP-Sep. 22]

Chapter – 21: Audit of PSU

190 Setir Ltd. is a company in which 59% of the paid up share capital is held by Punjab Government. The
company is engaged in the business of providing consultancy services in relation to construction
projects.
The Punjab Government is also planning to induct funds in the company in future, if required.
Nocri Ltd is a company controlled by Setir Ltd. The business of Nocri Ltd. is construction and has an
annual turnover of INR 2500 crore approx.
The audit of the financial statements of Nocri Ltd for the financial year ended 31 March 2023 got
completed but Nocri Ltd observed that during the course of audit, there was lot of intervention of
Comptroller & Auditor General of India, wherein C&AG was giving directions to the auditors on the
manner in which audit should be conducted in respect of certain areas.

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Further, it also received comments from C&AG on the audit report of the auditors. Nocri Ltd. is
seeking legal opinion to go against C&AG so that they can avoid unnecessary interference of C&AG
and is also looking to have new auditors appointed by Nocri Ltd with whom they will have an
engagement letter with the terms that those auditors don’t accept any interference of C&AG which
the existing auditors have not been able to avoid.
In this context, please advise which of the following should be correct?
(a) The stand of the existing auditors should have been better i.e. not to accept any interference of C&AG.
(b) Management could have planned the audit work better by including the same terms in engagement
letter with existing auditors instead of appointing another auditors.
(c) C&AG involvement could have been accepted if this was the audit of Setir Ltd. but not in case of Nocri
Ltd. and hence Nocri Ltd. should also reach out to its parent company to get this resolved.
(d) Stand of Nocri Ltd. is wrong as the C&AG may get involved in the audit of Nocri Ltd.
191 CGN Ltd. is a large company engaged in the business of oil exploration in India. The Tamil Nadu
Government and the Central Government hold 37% and 20% respectively of the paid-up share
capital of this company.
The C&AG appointed the statutory auditors of this company as per requirements of the Companies
Act, 2013. The company had a concern regarding this appointment because company wanted to
appoint another auditors as per their assessment, however, considering the legal hassles which
would have got involved, the company decided to go ahead with this.
The audit of the financial statement for the year ended 31 March 2023 got completed by the auditors
appointed by the C&AG. Subsequent to this, the C&AG also issued an order to conduct test audit of the
accounts of the company which was objected by the management of the company.
The management objected saying that the complete set of financial statements have been audited by
auditors appointed by the C&AG and hence this order is not acceptable because this would lead to
duplication of work.
Moreover, the management has also written to the C&AG that for the next financial year, the existing
auditors should either resign so that the management may bring in their own auditors or the C&AG
should have faith in the work of the auditors appointed by them. Please suggest how to resolve this
matter.
(a) The management’s stand is not correct. The C&AG may order test audit as per the requirements of the
Companies Act, 2013.
(b) The management’s stand is not correct. The C&AG may order test audit as per the requirements of the
Indian Penal Code.
(c) The management is correct and in this situation they get the right to appoint another auditor
considering the fact that the C&AG has lost faith in the work of auditors appointed by them.
(d) Such type of matters should be taken to arbitration as per the requirements of the Arbitration Act.
192 NOP Ltd. is a joint venture of Central Government and a private company and is engaged in the
business of distribution of electricity in Chennai. The Central Government holds 51% shares of the
company.
The company is acknowledged for its consumer-friendly practices. Initially it was completely owned
by the Government and was running into significant losses but after the joint venture, the aggregate
technical and commercial losses of the company showed a record decline.
The operations of the company have improved significantly as claimed by the management of the
company.

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The C&AG wants to conduct the performance audit of one of the departments of the company through
a subordinate office of Indian Audit and Accounts Department.
For this purpose, the audit programme has also been finalized and the Accountant General has
intimated the company that the audit would start within a day’s time. The company is concerned
because the programme which has been received from the Accountant General is quite detailed and
would involve significant time. Further the management of the company is quite surprised as to why
this audit should be conducted as this is not a company subject to such types of audits as per law.
The management of the company would like to have your inputs in respect of this matter. Please
guide.
(a) The notice for such type of audit should give reasonable time to the management to prepare
themselves. Further it should not be a detailed audit requiring significant time of the company.
(b) The C&AG may conduct such type of audits in respect of NOP Ltd. which would get covered in this
criteria, however, the notice for conducting such type of audit should give reasonable time to the
management to prepare themselves.
(c) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013. The
company should write to the Registrar of Companies in respect of this matter and till that time no audit
can be started.
(d) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013.
Further wherever this is applicable that is only for a small period of time. The company should write to
the Ministry of Corporate Affairs in respect of this matter.
193 AJ Petroleum & Refining Ltd. is a Maharatna Central Public Sector Undertaking (PSU) in India having
its registered office in Uttaranchal.
It is engaged in the business of oil refining, pipeline transportation & marketing, exploration &
production of crude oil & gas, petrochemicals, gas marketing and other downstream operations.
The PSU has global aspirations for which its management is working on various plans/ programmes
so that the same can be achieved in future. It is also planning to pursue diverse business interests by
setting up of various joint ventures with reputed business partners from India and abroad to explore
global opportunities.
Considering these objectives and other factors, the C&AG directed the performance audit in respect
of its certain activities/ functions which has been in progress. Before starting the audit, the detailed
scope and composition of audit team was shared with the management of the company and tentative
timelines were also given with which the management was fine. However, during the course of the
audit the audit team changed its audit programme to achieve the desired objectives which was
approved by the competent authority, however, the management was not happy with those changes.
The management wants the audit team to conclude the audit with the same scope as this is a special
type of audit wherein such flexibility cannot be accepted as that would defeat the purpose of the law.
However, the audit team has a different view. Please guide.
(a) Changes in audit programme in such type of audits are not acceptable as specified by the Companies
Audit and Auditors Rules, 2014.
(b) Changes in audit programme in such type of audits are not acceptable as specified by the Companies
Audit and Auditors Rules, 2014 and the Ministry of Law.
(c) Changes in audit programme in such type of audits can be accepted provided those are discussed with
the management and approved by the Competent Authority.

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(d) The C&AG should get involved in this matter after taking permission from the Central Government and
would require to change the audit team if the scope requires any changes as the same should have been
properly assessed by the audit team before commencing the audit.
194 A report submitted by you after an audit of a public sector unit is more likely to be finally reviewed
by
(a) Public Accounts Committee (PAC).
(b) Committee on Public Undertakings (COPU).
(c) Estimates Committee.
(d) Public sector Committee.
195 You have been given an assignment of audit of IT department of a PSU.
A checklist was handed over to you which contained many questions such as,
• Are separate user names and passwords assigned to individual users?
• Are periodical changes of passwords ensured?
• Are external (offsite) data backups maintained at a place outside the premises?
The type of audit being conducted is likely to be:
(a) Comprehensive audit.
(b) Propriety audit.
(c) Compliance audit.
(d) Financial audit.
196 In Case of PSU, Direct Reporting Engagement does not include
(a) Performance audits.
(b) Compliance audits.
(c) Financial audits.
(d) Comprehensive Audit. [MTP-April 21]
197 You have been given an assignment of audit of IT department of a PSU. A checklist was handed over
to you which contained many questions such as,
 Are separate user-names and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
 Are external (offsite) data backups maintained at a place outside the premises?
The type of audit being conducted is likely to be:
(a) Comprehensive audit.
(b) Propriety audit.
(c) Compliance audit.
(d) Financial audit. [RTP- May 23, MTP-Sep. 23]
198 With respect to audit of public sector undertaking, which among the below is related to propriety
audit?
(a) This audit is carried out by assessing whether activities, financial transactions and information comply
in all material aspects, with the regulatory and other authorities which govern the audited entity.
(b) This auditing focuses on the areas in which it can add value which have the greatest potential for
development. It provides constructive incentives for the responsible parties to take appropriate action.
(c) It is an audit under which the C&AG does not really cover again the field which has already been
covered. He conducts an appraisal or an efficiency cum performance audit.

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(d) It stands for verification of transactions on the tests of public interest, commonly accepted customs and
standards of conduct. This audit is directed towards an examination of management decisions in sales,
purchases, contracts, etc. [RTP-Nov. 22]

Chapter – 22: Miscellaneous

199 RIM Private Ltd. is engaged in the business of manufacturing of steel having annual turnover of INR
10,000 crore. The company is very capital intensive and has its plants at two locations – Mohali and
Hosur.
During the year ended 31 March, 2022, the company carried out a detailed physical verification of its
property, plant and equipment and also reassessed their useful lives by engaging a consultant. The
consultant submitted its report to the management on 21 April, 2022.
The statutory auditors of the company started their audit work from May 2022 and when this
information was given to them regarding the physical verification and the reassessment of the useful
lives of property, plant and equipment, the auditors told the management that the consultant should
have submitted its report to the auditors also independently. Further, in the absence of this direct
communication of the report of the consultant to the auditors, the audit team would have to review
the work of the consultant which is not efficient but it cannot be avoided now.
Management did not agree with both the points of the auditors that the consultant should have
shared report with the auditors directly and that the auditors need to review the work of the
consultant. The management would like to have your views on this matter.
(a) The view of the management seems to be correct because there is no such requirement that any
consultant of the company should share his report directly with the auditor. Also when the consultant
has already submitted a detailed report, no further review is required on that.
(b) Both the management and auditors are not correct. The auditor is not supposed to receive the report
directly. Further, the auditor needs to review the work of the consultant irrespective of the fact
whether he received the report directly or not.
(c) The auditor’s requirements are reasonable because he carries duty in respect of audit of financial
statements and by not getting report directly from the consultant, he would not know whether it
belongs to that consultant or not. And now only because of this lack of proper communication the
auditor would have to review the work of the consultant.
(d) Both management and auditors should find a solution to this problem. The management may request
the consultant to send the report to the auditor directly now. On the basis of the same, the auditor can
avoid unnecessary procedure related to review of report of the consultant.
200 M/s. MNO & Co. (a CA firm with 3 partners) are the statutory auditors of PCL Limited, a company
engaged in real estate business. PCL Limited recently launched a real estate project in Bangalore
Whitefield location at an all- inclusive price of ₹ 5,500. PCL Limited also announced that their first 50
customers would be allowed a special inauguration discount of 10%. Mr. M, one of the partners with
MNO & Co. and the audit engagement partner for PCL Limited booked one 3 BHK flat and he was
offered the all- inclusive price of ₹ 4,950 (after 10% inauguration discount). Another partner- Mr. N
also booked one 3 BHK flat at the all inclusive price of ₹ 5,500. Which of the following statements is
correct:

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(a) M/s. MNO & Co., being the auditors shall not suffer any disqualification on account of such business
transaction by Mr. M with audit client since Mr. N was not offered any discount in the booking price.
(b) M/s. MNO & Co., being the auditors shall not suffer any disqualification on account of such business
transactions by Mr. M and Mr. N with PCL Limited since the third partner- Mr. O had not done any
business transaction with PCL Limited.
(c) M/s. MNO & Co., being the auditors shall not suffer any disqualification on account of such business
transactions by Mr. M and Mr. N with audit client since business transactions with audit client in the
ordinary course of business, are allowed, without any consideration on transaction price.
(d) M/s. MNO & Co., being the auditors shall not suffer any disqualification on account of such business
transaction by Mr. M with audit client if Mr. M qualified as among the first 50 eligible customers as per
the marketing scheme and it can be demonstrated that PCL Limited has passed on similar 10%
inauguration discount to other 49 customers and further, the discount of 10% offered to Mr. M was in
the nature of routine commercial transaction, in the ordinary course of business of PCL Limited.
201 BC Ltd. is the business of manpower consulting. The company has a huge cash and bank balance
including fixed deposits with banks. During the course of audit of the financial statements of the
company for the year ended 31 March 2023, auditors circulated independent bank balance
confirmations. The auditors received all the balance (covering fixed deposits) confirmations
independently. Auditors observed that the fixed deposits balances as per the independent balance
confirmation did not match with the books balances in some cases. Management produced the fixed
deposit certificates to the auditors wherein the balances of fixed assets matched with the balances as
per the books. How should the auditor deal with this matter?
(a) Auditor should qualify the audit report in respect of differences in book balances of fixed deposits vis-
a-vis independent balance confirmations.
(b) Auditor should consider the fixed deposit certificates produced by the management and basis that any
differences in book balances of fixed deposits vis-a-vis independent balance confirmations should be
ignored.
(c) Auditor should consider the documentation provided by the management i.e. the fixed deposit
certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should obtain balance confirmations again.
(d) Auditor should consider the documentation provided by the management i.e. the fixed deposit
certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should look to perform alternate procedures and
basis that the matter should be looked at.
202 KMP Ltd. is in the business of manufacturing of tiles and sanitary-ware. The company has a large
inventory every year. Annual turnover of the company is ₹ 8000 crores. The company has 15 plants
across India. The management of the company carries out physical verification of inventory every
year at the time of reporting date. During the year ended 31st March 2023, it was found by the
management that the inventory sheets of 31st March 2022 did not include seven pages containing
details of inventory worth ₹ 59 crores. Management has included this inventory in the valuation of
inventory as of 31st March 2023. Management has also explained that considering the size of the
company this may happen at times as the inventory is huge and lying at various locations. Moreover,
the amount of the inventory is insignificant if considered as a percentage of revenue or inventory.
State how you will deal with this matter as an auditor in the accounts of the company (towards
substantive audit procedures and excluding the impact on auditor’s assessment under Internal
Financial Control Framework) for the year ended 31st March 2023.

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(a) As the matter is not relevant to current period, no reporting in respect of this matter would be required
in the auditor’s report for the year ended 31st March 2023.
(b) Auditor should include an emphasis of matter para in the audit report because of the effects or possible
effects of the error in the auditor’s report for the year ended 31st March 2023.
(c) Auditor should ask the management to restate the financials to adjust the error. If financial statements
are not restated, auditor may modify his opinion on current year's financial statements considering the
materiality.
(d) Considering the matter as not relevant to current period figures, the management may include a note in
the financial statements and basis that no reporting in respect of this matter would be required in the
auditor’s report for the year ended 31st March 2023. [RTP-May. 19, MTP-March 23]
203 ABC Ltd. is a wholly owned subsidiary of Japanese company, ABJ Ltd. ABC Ltd. has many expatriates
(Expats) working in the company whose tenure range from 2 to 5 years. It was observed by the
statutory auditors that ABC Ltd. has not been deducting and depositing the TDS (tax deducted at
source) on salaries of expats. As per auditor, impact of this can be significant as the company has
many expats and salary amount is significant. However, management is of the view that TDS on
salary of expats would lead to unnecessary hassles to the expats and they serve the company only for
a short period. Advise.
(a) As the matter relates to statutory liability only, the reporting requirements do not arise till the time this
matter becomes disputed.
(b) Being a statutory non-compliance, the auditor is required to assess the significance of the matter and
should report the same in CARO.
(c) Being a statutory non-compliance, the auditor is required to assess the significance of the matter and
should report the same in main report along with CARO.
(d) As the expats are temporary workers, auditor may consider the management’s view and ignore this
matter. [RTP-May 19]
204 KMP Ltd. is in the business of manufacturing of tiles and sanitary-ware. The company uses ERP
system for updating and recording raw material inventory. Inventory rates are calculated by ERP on
moving average price (MAP) basis. The company has done ABC analysis of all raw material inventory
items and has vast number of items in each category.
You, the auditor of the company has limited time for raw material inventory verification. Based on
your observation, you have to form an opinion with respect to the correctness of inventory value
calculated by the management. Choose the correct basis for framing the opinion:
(a) Based on ABC analysis, check physical inventory of all “A” class items during allotted time and matching
it with ERP stock.
(b) Understand the process of recording of inventory in ERP to ascertain potential weaknesses and
checking physical inventory of mostly “A” class items, some “B” class items and some “C” class items.
(c) Check physical stock of only those items, which have standard packaging so that verification is faster
considering the limited time.
(d) Check physical inventory of “A” class items as much as possible along with certain “B” class items and
certain “C” class items on sample basis in value wise descending order, compare the physical stock with
ERP system, and tabulate the result. The exercise should be continued till the end of allotted time.
[RTP-May 19]
205 X Ltd., a public company is having its Head Office at Delhi and the employees from various branch
offices used to visit Delhi for official meetings. So, the company decided to construct guest house for

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Part I – Multiple Choice Questions
their employees staying in Delhi, as the stay in hotel was very expensive. The management took all
sanctions to construct the building and the expenditure was incurred in conformity with the rules
and regulations. The building was ready for use by the year 2021 on which a total expenditure of ₹
3.60 crores was done, but it was not used by the employees and they continued to stay in hotel. From
the financial 2022-23 onwards the expenses were booked in company’s profit and loss account for
the upkeep and maintenance of the building and the hotel charges paid for the stay of employees.
Company is having its own internal audit department. One of the directors of the company,
demanded propriety audit to ensure compliance with Sec. 186 of the Companies Act, 2013 and
ensure that the transactions represented by books are not prejudicial to the interests of the
company. Advise whether there is any need for propriety audit?
(a) Propriety audit is concerned with the scrutiny of executive decisions and actions affecting the
company’s financial situation. Huge expense has been done on construction of building and even then, it
was not used, which had a major impact on company’s profit and loss statement, hence propriety audit
is required.
(b) Company is having a separate internal audit department and these areas are to be covered in the scope
of internal auditors, hence propriety audit is not required.
(c) The director has no right to demand propriety audit, as in the case of Public Limited Company only C &
AG is authorised to decide on whether a propriety audit is required or not.
(d) There is no need of propriety audit as the management took all sanctions to construct the building and
the expenditure was incurred in conformity with the rules and regulations. [MTP-April 19]
206 While auditing payroll of a company, you determine the following data from a review of the current
year and prior year audit files:
• As at 31st March, 2022, the company had 500 employees.
• On 1 April, 2022, 8% of staff were made redundant, effective immediately, due to discontinuation
of a product line.
• On 1 June, 2022, all remaining staff received a 8% pay rise.
• Over the course of the year, sales levels met performance targets which resulted in a fixed bonus
of ₹ 8,000 being paid to each employee on 31st March, 2023.
The following audit evidence has been gathered relating to the accuracy of wages and salaries:
(1) Proof in total calculation performed by an audit team member.
(2) Recalculation of the gross and net pay for a sample of employees by an internal audit team
member of client company.
(3) Written representation from the directors of client company confirming the accuracy of wages
and salaries.
(4) Verbal confirmation from the finance director of client company confirming the accuracy of
wages and salaries.
What is the order of reliability of the audit evidence starting with the MOST RELIABLE first?
(a) Audit evidence - 1, 2, 3, 4
(b) Audit evidence - 1, 3, 4, 2
(c) Audit evidence - 2, 1, 3, 4
(d) Audit evidence - 2, 1, 4, 3
207 Given below is an extract from the list of supplier statements as at 31st March, 2023 held by the
company and corresponding payables ledger balances at the same date along with some commentary
on the noted differences:

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Supplier Payables ledger Commentary
Statement balance balance (₹)
(₹)
A Ltd. 90,000 70,000 Difference in balance is due to an invoice which is
under dispute due to faulty goods which were
returned on 29 March, 2023.
B Ltd. 1,85,000 1,15,000 Difference in balance is due to an invoice dated
27 March, 2023 for ₹ 70,000 which was not
recorded in the financial statements as the
invoice was not received until 3 April, 2023.
The audit manager has asked you to review the full list of trade payables and select balances on
which supplier statement reconciliations will be performed.
Which of the following statement is correct in respect of including or excluding from your sample?
(a) Include major suppliers with nil balances at the year-end.
(b) Include suppliers where the statement agrees to the ledger.
(c) Exclude suppliers with significant balances at the year-end.
(d) Exclude suppliers which have a high volume of business with client company
[MTP-March 19, March 19]
208 OPE Ltd. issued a prospectus in respect of an IPO which had the auditor’s report on the financial
statements for the year ended 31 March, 2023. The issue was fully subscribed.
During this year, there was an abnormal rise in the profits of the company for which it was found
later on that it was because of manipulated sales in which there was participation of Whole-time
director and other top officials of the company. On discovery of this fact, the company offered to
refund all moneys to the subscribers of the shares and sued the auditors for the damages alleging
that the auditors failed to examine and ascertain any satisfactory explanation for steep increase in
the rate of profits and related accounts.
The company emphasized that the auditor should have proceeded with suspicion and should not
have followed selected verification. The auditors were able to prove that they found internal controls
to be satisfactory and did not find any circumstance to arouse suspicion.
The company was not able to prove that auditors were negligent in performance of their duties.
Please suggest your views on this.
(a) The stand of the company was correct in this case. Considering the nature of the work, the Auditors
should have proceeded with suspicion and should not have followed selected verification.
(b) The approach of the auditors look reasonable in this case. The auditors found internal controls to be
satisfactory and also did not find any circumstance to arouse suspicion and hence they performed their
procedures on the basis of selected verification.
(c) In the given case, the auditors should have involved various experts along with them to help them on
their audit procedures. Prospectus is one area wherein management involves various experts and
hence the auditors should also have done that. In the given case, by not involving the experts the
auditors did not perform their job in a professional manner. If they had involved experts like forensic
experts etc., the manipulation could have been detected. Hence the auditors should be held liable.
(d) In case of such type of engagements, the focus is always on the management controls. If the controls are
found to be effective then an auditor can never be held liable in respect of any deficiency or
misstatement or fraud. [MTP-Nov. 21, Mar. 22, March 23]

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Part I – Multiple Choice Questions
209 You are the audit senior in charge of the audit of ASD Ltd., and have been informed by your audit
manager that during the current year a fraud occurred at the client. A payroll clerk sets up fictitious
employees and the wages were paid into the clerk’s own bank account. This clerk has subsequently
left the company, but the audit manager is concerned that additional frauds have taken place in the
wages department. Which of the following audit procedures would be undertaken during the audit of
wages as a result of the manager’s assessment of the increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the
financial impact of amounts incorrectly paid into the payroll clerk’s bank account.
(2) Review the supporting documentation to confirm the total of the fraudulent payments made and
assess the materiality of this misstatement.
(3) Review and test the internal controls surrounding setting up of and payments to new joiners to
assess whether further frauds may have occurred.
(4) Review the legal action taken by the management against the payroll clerk who was involved in
the fraud and see whether he is punished for his actions.
(a) Audit procedures 1,2,3
(b) Audit procedures 2,3,4
(c) Audit procedures 1,3,4
(d) Audit procedures 1,2,4 [MTP-Oct. 19, April 23]
210 One of your audit client Vernon Co. with a year ending 31 March, 2023 is planning to prepare the
financial statements from the next year as per Indian Accounting Standards (Ind AS). The finance
director of Vernon Co. has contacted the audit engagement partner, asking if your firm can provide
training on Ind AS to the accounts department of the entity. This will help them to understand all the
provisions of Ind AS and the transition process will be easier.
Which of the following options needs to be considered by the audit engagement partner?
(a) The issue is whether there is a self-interest threat, as the auditor will receive separate training fees for
the service provided. The audit partner should decline the training assignment.
(b) The issue is whether the audit firm would be likely to possess the requisite competence to provide such
training to the staff of the entity. The audit partner should decline not all the qualified people are good
trainers.
(c) The audit partner could go ahead with the training service and disclose the fact in its audit report about
the service provided during the period. This will safeguard and reduce the threat to an acceptable level.
(d) The audit partner needs to assess the materiality of the figure, and the degree of subjectivity involved.
If it considers that safeguards like using separate personnel, could reduce the threat to an acceptable
level, then it can go ahead with both the audit and the training assignment. [MTP-Oct. 19]
211 ABC Private Ltd. was incorporated on 21st March, 2022 and has limited operations. However, the
capital induction in the company was huge because it would be capital intensive. The company is in
the process to set up a plant in Karnataka which should be completed by 31st May, 2023. The
company’s management prepared its financial statements for the year ended 31st March, 2023. The
auditors were also called to start the work in April 2023. The auditors would be able to complete
their work by 31st May, 2023 and accordingly would issue their audit report by 1st week of June,
2023 as per the plan agreed with the management. The auditors have some observations related to
preparations of financial statements which are not in compliance with Schedule III and most
importantly the point related to capitalization of the plant as Property, Plant and Equipment in the
financial statements for the year ended 31st March, 2023.
Please suggest which of the following statements would be correct.

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Part I – Multiple Choice Questions
(a) The compliance of Schedule III shall start from 1 April, 2022 for this company as per Companies
Accounts (Amendment) Rules, 2016.
(b) The compliance of Schedule III shall start from first financial period; however, some exemptions would
be applicable as per Companies (Accounts) Rules, 2014.
(c) There should be full compliance of Schedule III and plant should be kept as CWIP as per Schedule III.
(d) There should be full compliance of Schedule III and plant should be shown as PPE as per Schedule III.
[MTP-Oct. 19]
212 The audit team has obtained the following results from the trade receivables circularization of Nemi
Co for the year ended 31 March, 2023.
Customer Balance as per Balance as per customer Comment
sales ledger (₹) confirmation (₹)
AM Co 2,25,000 2,25,000
AN Co 3,50,000 2,75,000 Invoice raised on 29 March 2023
AO Co 6,20,000 4,80,000 Payment made on 30 March 2023
AP Co 5,35,000 5,35,000 A balance of ₹ 45,000 is currently being
disputed by AP Co.
AR Co 1,78,000 No reply
Which of the following statements in relation to the results of the trade receivables circularisation is
TRUE?
(a) No further audit procedures need to be carried out in relation to the outstanding balances with AM Co.
and AP Co.
(b) The difference in relation to AN Co. represents a timing difference and should be agreed to a pre-year-
end invoice.
(c) The difference in relation to AO Co. represents a timing difference and should be agreed to pre-year-
end bank statements.
(d) Due to the non-reply, the balance with AR Co. cannot be verified and a different customer balance
should be selected and circularized. [MTP-April 21, Sep.23]
213 You are the audit senior of Tey & Co are responsible for the audit work to be managed for the fixed
assets of the company. Tey & Co has 4 properties amounting to ₹ 12.5 crore. One of the important
tasks ahead for you is to confirm the ownership of these properties.
Which of the following would provide the most persuasive evidence of the ownership?
(a) To conduct a physical inspection of all the properties located at different areas.
(b) To ask the management registration documents of these properties and inspect and verify them.
(c) To check whether all the properties are recorded properly in the fixed asset register and depreciation
has been calculated correctly.
(d) Enquire with the management, if these properties are insured and review the insurance
documentation. [MTP-April 21]
214 The notes to the account statement of Nemi Ltd. shows the break-up of accounts payable for the
Financial Year 2022-23 as follows:
Accounts Payable Amount (in ₹)
Mr. K 1,20,000

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Mr. R 40,000
Mr. B 14,56,000
Total 16,16,000
CA. Raju, the auditor of Nemi Ltd., wants to investigate the valuation of accounts payable of Mr. B
amounting to ₹ 14,56,000. Which of the following procedures is best fitted & more reliable to be
followed by CA. Raju to get more reliable evidence for the existence of such balance as on 31st March,
2023?
(a) Inspect each and every journal entry passed in the books of Nemi Ltd.
(b) Ask Nemi Ltd. to provide the details of payment made during the year 2023-24.
(c) Inspect the invoices issued by Mr. B and the payments made.
(d) Interrogate the cash manager of Nemi Ltd. [MTP-Oct. 21]
215 The firm from which you are pursuing your articleship training is the internal auditor of ABC Ltd.
While conducting the audit of the medical expense reimbursements of the company employees, you
come across some bills which are clearly not medical in nature, and some others which have been
overwritten. During the discussions, the accountant points out that the employee is a functional head
who enjoys a significantly higher medical expense reimbursement limit, and that you should ignore
those bills as the amount is not material. You will:
(a) Accept the explanation and the bills.
(b) Recommend that the claim should be reduced, and clear guidelines should be issued to all employees
on the matter, with a provision for disciplinary action.
(c) Recommend that the employee be asked to submit fresh bills to avail the tax benefit.
(d) Recommend that the employee be taxed on the aggregate amount of the suspect bills.
[MTP-March 21, Oct. 21]
216 M/s Sati and Associates were appointed as the statutory auditors of Power King Limited for the audit
of financial year 2022-23. Power King Limited has a power generating plant in Sikkim. At the time of
accepting the engagement, it was decided among the engagement partner (CA Sati) and the
management that since CA Sati and his team is doing the audit of a client having power plant in
Sikkim for the first time, it will be the duty of the management to update the audit team regarding all
the taxes and statutes applicable to units situated in Sikkim. Which of the following is correct in this
regard?
(a) The engagement team, being the auditor of Sikkim based power plant for the first time can always rely
on the management’s information and can work accordingly.
(b) The engagement team should understand the Power King Limited business environment and should
obtain knowledge about the laws and statutes applicable in this case.
(c) The engagement team should not accept the audit of such power plant situated in Sikkim of which he
has no prior knowledge.
(d) The engagement team can very well accept the audit of Power King Limited and with respect to aspects
related to Sikkim law he can give disclaimer of opinion, if required. [MTP-March 22]
217 The following inherent limitations in an audit affect the auditor’s ability to detect material
misstatements except:
(a) Test and sampling.
(b) Audit process permeated by judgment.
(c) Poor corporate governance.
(d) Audit evidence. [MTP-Sep. 22]

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218 Below is an extract from the list of supplier statements as at 31st March 2023 held by the Company
and corresponding payables ledger balances at the same date along with some commentary on the
noted differences:
Supplier Statement balance Payables ledger balance
₹'000 ₹'000
Shubh Company 78 66
Labh Company 235 205
The difference in the balance of Shubh Company is due to an invoice which is under dispute due to
defective goods which were returned on 30th March 2023. Which of the following audit procedures
should be carried out to confirm the balance owing to Shubh Company?
I. Review post year-end credit notes for evidence of acceptance of return.
II. Inspect pre year-end goods returned note in respect of the items sent back to the supplier.
III. Inspect post year-end cash book for evidence that the amount has been settled.
(a) 1, 2 and 3.
(b) 1 and 3 only.
(c) 1 and 2 only.
(d) 2 and 3 only. [RTP-May 21; MTP-Sep. 22]

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Part I – Multiple Choice Questions
Answer Key
Q. No. Answer
1 (a) The changes in the audit team were not appropriate except for the field incharge who had left the
firm. EQCR should have been a member of the Institute of Chartered Accountants of India (ICAI).
2 (c) The requirement in view of the audit partner was valid. The conclusions drawn from the results of
final analytical procedures are intended to corroborate conclusions formed during the audit of
individual components or elements of the financial statements.
3 (a) The argument of the client is not valid. Sample selection is based on certain principles as per SA
530 and that is on the assessment of the audit team. It may change year on year and hence the
client should provide the required information to the audit team.
4 (c) Both (a) and (b).
5 (b) Doubt of non-compliance to laws by PQR Ltd.
6 (d) Auditor Mr. A uses a sample of 50 consecutive cheques to test whether cheques are signed by
authorised signatories rather than picking 50 single cheques throughout the year.
7 (d) An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of evidence.
8 (a) The application of relevant training, knowledge and experience, within the context provided by
auditing, accounting and ethical standards, in making informed decisions about the courses of
action that are appropriate in the circumstances of the audit engagement.
9 (b) Both the auditor’s perception of the financial information needs of users of the financial
statements, the size or nature of a misstatement.
10 (c) Poor corporate governance.
11 (b) Audit Partner’s view is not correct as the audit team did the right thing.
12 (a) The engagement letter should have been signed before commencing the audit work.
13 (c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit
matters other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu
& Co. shall state, under ‘Key Audit Matters’ para, that ‘except for the matter described in the Basis
for Adverse Opinion section, we have determined that there are no other key audit matters to
communicate in our report.
14 (a) SA 600, “Using the work of Another Auditor”.
15 (d) Other matter paragraph.
16 (c) Auditor has obtained or expects to obtain the other information.
17 (a) Auditor has obtained some or all of the other information.
18 (d) (i), (iii), (v) and (vi)
19 (d) A Prospective CA, soon to join the Auditor’s Firm as a Partner.
20 (a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
statements modified with respect to the corresponding figures included therein.
21 (b) No, the current year’s communication may repeat the description from previous communication or
simply reference the previous communication.

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Part I – Multiple Choice Questions
22 (c) The requirement of the auditors for opening balances as well as for the period after 31 March 2021
is valid. After the requirements of SA 510 and SA 560, audit team is required to perform these
procedures.
23 (b) The presence of an internal audit function and verification of the subject matter by them.
24 (d) 7 years.
25 (c) Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and
respond to the risk of material misstatement arising from the entity’s failure to appropriately
account for related party relationships, transactions and balances, and obtaining merely
management representation letter can be considered to be sufficient appropriate audit evidence.
26 (a) (I) & (III)
27 (c) In accordance with SA 710, CA Ram should qualify current period audit report with respect to
corresponding figures only.
28 (b) Stratified sampling.
29 (a) I and II.
30 (d) The entity’s holding of equity in other entities.
31 (a) The auditor is responsible for communicating matters required by SA 260 to those charged with
governance. Also, management has a responsibility to communicate matters of governance
interest to those charged with governance. Communication by the auditor does not relieve
management of its responsibility.
32 (a) Even if the applicable financial reporting framework establishes minimal or no related party
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related
party relationships and transactions and should sufficiently be able to conclude whether the
financial statements, insofar as they are affected by those relationships and transactions achieve a
true and fair presentation and are not misleading.
33 (b) Explanation on the matter given by management.
34 (c) Non-declaration of dividend to equity shareholders.
35 (a) Statistical sampling.
36 (c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating
procedures are designed to assist in the prevention of non-compliance with law and regulation
and report accordingly.
37 (b) In the event of becoming aware of information during the audit that would have caused the auditor
to have determined a different amount (or amounts) initially.
38 (c) (i) & (iii)
39 (a) (i)-3, (ii)-1, (iii)- 2, (iv)- 4.
40 (d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor
is required to include such reference in his report as per the requirements of the auditing
standard.
41 (a) The management is responsible for preparation of books and financial statements. If management
is not willing to acknowledge it, audit engagement should not be accepted.

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42 (d) The audit senior communicates all the identified misstatements to the appropriate level of
management of the entity on a timely manner. Then management can assess the findings and
confirm they are in agreement. Assuming management agrees, they will be requested to make the
necessary corrections
43 (a) The engagement team should consult the previous year’s engagement team during the course of
their planning.
44 (c) The approach of the audit team not to document audit programme is not correct. The audit team
needs to document it properly at the time of planning stage itself and any changes made after that
should also be documented with explanations.
45 (b) The view of the audit team looks fine because without testing of internal controls covering all
types of controls (manual and automated), those controls cannot be said to be operating
effectively.
46 (c) First modify the audit strategy and thereafter, prepare the audit plan according to the modified
strategy.
47 (d) A New Contract received by Gamma Ltd. form a Foreign Client during the course of the audit.
48 (c) The assessment of audit team is wrong for this company.
49 (a) The request of audit team is correct and the management should provide that.
50 (d) The view of the management is not correct.
51 (b) The auditors are correct in this case and the management should provide the required
documentation.
52 (c) Detective control.
53 (d) Are monthly bank reconciliations implemented for each and every bank accounts of the company?
54 (c) Abuse by Process Owners.
55 (c) Low in order to reduce audit risk to an acceptably low level.
56 (b) As per the requirements of auditing standards, this documentation can be in a mix of both soft and
hard copy.
57 (c) The approach of the management is completely fine. The auditors need to correct their
understanding of the internal controls and the application of internal controls. A process cannot be
limited to have either only manual control or automated control.
58 (b) The view of the audit team looks fine because without testing of internal controls covering all
types of controls (manual and automated), those controls cannot be said to be operating
effectively.
59 (c) The auditors are correct because by using audit tools they are performing their audit procedures.
60 (d) Take the Service Organisation control audit report to review.
61 (c) Business performance reviews.
62 (a) The approach of audit team to obtain detailed understanding of the company before starting with
the audit procedures is absolutely fine. If the auditors don’t understand the systems properly the
audit procedures may not be appropriate.
63 (d) Preventive Control.
64 (c) Loss of IT General Controls.

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65 (d) Monitoring of effectiveness of controls activities by Internal Audit function.
66 (c) Detective control.
67 (d) Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949.
68 (a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
69 (a) Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.
70 (c) All the partners of the firm can collectively sign 600 tax audit reports.
71 (a) Not exceed 25 hours a week.
72 (d) Statutory auditors can be appointed for this work.
73 (c) All the partners of the firm can collectively sign 720 tax audit reports.
74 (a) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act, 1949 he shall not use
the designation ‘Member of the Parliament’ in addition to that of a ‘Chartered Accountant’.
75 (c) Yes, it is a misconduct under clause 7 of Part I of First Schedule and he can be reprimanded, his
name can be removed from the register of members for 3 months and fine upto ₹ 1,00,000.
76 (c) Familiarity Threat.
77 (d) RP & Affiliates.
78 (a) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is an auditor
and also he cannot accept appointment of auditor of a Kalavitur Ltd. without finishing of the
cooling period for the same.
79 (b) The dilemma of Mr. B is not correct as it is positive evidence of delivery as the same is received
from the official email of the outgoing auditor, as per the Code of Ethics.
80 (d) The action of the management is not correct.
81 (d) Mr. P cannot provide additional services.
82 (a) To obtain no objection certificate from Alfa Ltd. before start of the audit.
83 (d) To report fraud to Central Government and in Auditor’s Report.
84 (d) Claim of XYZ & Co. is not valid as the ceiling of 20 company audits doesn’t include audit of private
company having paid up capital less than ₹ 100 crores.
85 (c) Mr. Sunil cannot take up the management services as his firm M/S Garg & Associates is the
statutory auditor of ALTO Ltd.
86 (b) Removal is not valid as to remove the auditors before the expiry of the term, prior permission from
the Central Government is required.
87 (d) 12
88 (b) If the amount of fraud is more than ₹100 lacs; the auditor should have reported the matter within
2 days of his knowledge to the Board of Directors/Audit committee of the company seeking their
reply or observations within 45 days. After completion of 45 days the auditor should forward his
report to the Central Government along with the reply if any received from Board/Audit
Committee.
89 (c) The borrowings of the company are above threshold, hence reporting on adequacy and operating
effectiveness of IFC would be applicable.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
90 (a) The first auditor of VAS Ltd. shall be appointed by the Comptroller and Auditor- General of India
within 60 days from the date of registration.
91 (a) As per the Companies Act, 2013, since the amount of fraud is more than ₹ 100 lac; the auditor
should have reported the matter within 2 days of his knowledge to the Board of Directors/Audit
committee of the Company seeking their reply or observations within 45 days. After completion of
45 days, the auditor should forward his report to the Central Government along with the reply, if
any, received from Board/ Audit Committee.
92 (b) (ii) and (iv).
93 (b) Mr. Kartik cannot provide investment advisory services directly or indirectly to the company or its
holding company or subsidiary company as per section 144 of the Companies Act 2013. Moreover,
a Chartered Accountant in Practice is not permitted to render any service which is out of the scope
of the approved Management Consultancy Service.
94 (c) Yes. Since the appointment is made within 30 days from the date of resignation of CA. Ansh, it
should have been done by C&AG and not by the Board of directors. Board of Directors can make
the appointment only if no auditor is appointed even beyond 30 days.
95 (d) The requirement of the auditor is beneficial for the company because by giving an explanation of
the matter, on which auditor has given a qualification, in the notes to accounts, the management
would be able to explain their perspective/ point of view to the users of the financial statements.
In that case, auditor while giving the qualification can give reference to the notes to accounts
otherwise the entire matter would form part of the audit report. However, the auditor should not
hold his report if the management does not want to give any explanation in the notes to accounts.
96 (b) Management should restate the financials to adjust the error. Otherwise auditor may modify his
opinion on current year's financial statements considering the materiality.
97 (b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter and hence
should be reported accordingly by the auditor in his audit report.
98 (d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor
is required to include such reference in his report as per the requirements of the auditing
standard.
99 (a) Adverse
100 (b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
discrepancies in the basis for adverse opinion paragraph of the auditor’s report.
101 (c) The auditor’s report should describe the management responsibility in a section with heading
“responsibility of management for financial statements”.
102 (c) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give a
true and fair view’. The auditor should also include a ‘Basis for Adverse Opinion’ paragraph below
the opinion paragraph.
103 (b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit
evidence before disclaiming the opinion.
104 (d) The statutory auditor should give a qualified opinion.
105 (c) Adverse opinion.
106 (c) The entity’s revenue for the year is ₹ 10.5 Cr. which exceed the limit of ₹ 10 cr. Hence, the entity
has to provide the comment on the matter prescribed under CARO, 2020.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
107 (d) The CARO, 2020 is applicable to the company as the borrowing of the company exceeds the
prescribed limit.
108 (c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and
shortages within the class of an inventory and must be based on value for each class of Inventory.
109 (d) CARO, 2020 will not be applicable as the company will fall under the exemption provided in the
Order for Small Company as per section 2(85) of the Companies Act, 2013.
110 (a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA. A and state if
he has taken into consideration the issues or objections raised by CA. A.
111 (b) ₹ 0.65 lakh.
112 (d) If the auditor does not receive audited financial statements of French company, he should modify
his audit report.
113 (c) Consolidation of PPP Gmbh should be done and GAAP conversion adjustments are also required to
be audited.
114 (b) For CFS, method of depreciation of SMA Pvt. Ltd. may continue to be different, however, method of
valuation of inventory should be aligned with that of the parent.
115 (a) Auditors should accept the management certified accounts of joint venture; evaluate implications
on audit report as qualification will be required for unaudited components as per SA 705.
116 (c) In an audit/review of consolidated financial statements (whether condensed or complete), the
principal auditor is not required to re-perform audit/ limited review of the components and hence
the requirement of auditor is not correct.
117 (b) Auditor should request the management to restate the financials to adjust the error related to
consolidation of joint ventures in standalone financial statements. If adjustments not made,
auditor may modify his opinion on current year's financial statements considering the materiality.

118 (a) Position taken by the management is correct.

119 (d) No adjustment is required as there can be different methods of depreciation for its assets for the
group companies.

120 (a) SA 600 is the relevant SA; CA Ajay is correct in asking for information from CA Suresh through a
questionnaire.

121 (c) Permanent consolidation adjustments.

122 (a) Management must prepare the consolidated financial statements as per the requirements of the
Companies Act, 2013.

123 (d) Executive Director Mr. Ram is not liable for punishment as there is no offence u/s 127 section of
the Act.

124 (a) Minimum of 3 directors with independent directors forming a majority.

125 (b) The Board of directors will have at least 1 independent woman director.

126 (c) Not less than 6 directors.

127 (a) 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 independent
director.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
128 (b) Auditor should verify the composition of Board and examine its impact on compliance throughout
the reporting period as a part of certifying compliance with the requirements of corporate
governance.

129 (a) Approval of shareholders by special resolution shall be obtained every year.
130 (a) XYZ Ltd. shall submit a quarterly compliance report on corporate governance in the format as
specified by its Board from time to time to NSE within 21 days from the close of quarter. The
report shall be signed either by the Compliance Officer or the Chief Executive Officer of XYZ Ltd.
131 (d) Any of the Non-Executive Director
132 (a) Both RST Ltd. and PQR Ltd. shall undertake Secretarial Audit.
133 (d) Kailash Ltd. is correct in conducting two meeting of board of directors therefore, CA Shiva should
not give an adverse or qualified statement in this regard.
134 (a) A penalty should be levied on the auditors but that should not be equivalent to the damages
suffered by the stakeholders. The damages would be required to be made good by the directors of
the company.
135 (c) This may lead to criminal liability wherein every person who authorises the issue of such
prospectus shall be liable under section 447 of the Companies Act.
136 (c) Vimal would be liable to rigorous imprisonment which may extend to seven years and to a fine.
137 (d) The Statutory Auditors should not have delegated the inventory level checking to the Internal
Auditor, as the risk assessed was material. Further, the audit documents are Statutory Auditor’s
property and responsibility. Also, the Statutory Auditor should maintain confidentiality during all
the stages of the audit. Therefore, it was wrong on the part of the Statutory Auditor to handover
the task of audit documentation to the Internal Auditor.
138 (c) The argument of the auditors is not valid. The final outcome of the litigation covers the experts and
hence the auditors also get covered to contribute towards the losses suffered by the persons.
139 (d) The view point of the officers is incorrect because as per section 138 of the Companies Act, 2013,
the internal auditor shall either be a chartered accountant or a cost accountant (whether engaged
in practice or not), or such other professional as may be decided by the Board.
140 (c) Internal auditor observation should be reported in his report along with management comments.
141 (c) Report the matter in the Internal Audit Report and check for the compliance of the same in the
next audit period.
142 (c) The statutory auditors are not required to go to the extent of review of detailed working papers of
internal auditors.
143 (c) Both (a) & (b).
144 (c) (ii), (iii) & (iv) only.
145 (d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the Simon travels for the organisation.
146 (c) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’,
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for
Management’.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
147 (a) If the impact of the adjustments related to ICDS identified by the auditors is material then such
adjustments need to be reported in Form 3CD. And disclosures in respect of ICDS should in any
case be given in Form 3CD.
148 (d) The company would be covered under tax audit for the FY 2021-22 and 2022-23. It would need
Form 3CB for FY 2021-22 and Form 3CA for FY 2022-23.
149 (d) MNC Ltd. should report as per Form 3CA.
150 (c) None of the payment to a single party during a day exceeds the prescribed limit, thus, it should not
be reported in Form 3CD.
151 (b) Tax audit under section 44AB of the Income Tax Act, 1961 shall be applicable as it is having an
effective turnover of ₹ 1.03 crore, which is more than the limit prescribed.
152 (b) Refund of custom duty to the extent of ₹ 2 crore need not be reported in clause 16 as it is admitted
by custom authorities in the next financial year.
153 (c) Any change in the Partners since the last date of the preceding year has to be mentioned under
clause 9(b) of Form 3CD.
154 (d) In the given case, even though the initial price between the target company and the acquirer is
already set but still the firm needs to look at any hidden liabilities which may arise in the two cases
– show cause notices and labour claim. Accordingly, the firm has done the right thing by reporting
these matters to the acquirer.
155 (c) The procedures of the investigating accountant look completely reasonable considering his scope
of work. Further, no changes are required in his work approach.
156 (b) Consider extending investigation procedures like corroborative enquiry with Finance Head,
review of appropriate daily cash summaries etc.
157 (d) II only
158 (b) An application is to be made to the competent court in India by the inspector and such court may
issue a letter of request to a court or an authority in such country for seeking evidence.
159 (a) Criminology and evidence gathering.
160 (a) Report can include a section to identify those involved in fraud. This is recommendatory and in
line with the appropriate practice of reporting.
161 (b) The objection raised by OM Leathers is not correct, as due diligence refers to an examination of a
potential investment to confirm all material facts of the prospective business which a company
wants to acquire and financial projection is a part of same.
162 (d) The time for on-site review should not have extended beyond 7 working days.
163 (c) Peer reviewer needs to share draft report with the firm before finalisation.
164 (b) A Peer Reviewer shall be a Chartered Accountant having atleast 7 years of Audit experience.
165 (b) The Statement defines the scope of peer review which revolves around compliance with technical,
ethical and professional standards; quality of reporting; office systems and procedures with regard
to compliance of assurance engagements; and, training programmes for staff including articled and
audit assistants involved in assurance engagements. Hence the comment of peer reviewer on the
training programmes for staff (including articled and other assistants) concerned with assurance
functions is within the scope of peer review.
166 (b) Accounting standards notified under Companies Act, 2013.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
167 (d) Training program for staff concerned with assurance function, including availability of
infrastructure.
168 (b) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are
discharged in favour of bank and check that the lien is marked in the computer software.
169 (d) Bank can regularise the account before balance sheet date but should ensure that the amount has
been paid through genuine resources and not by sanction of additional facilities, and the account
remains in order subsequently.
170 (c) Credit the excess of ₹ 1 lakh to Provision for loss on sale of NPAs.
171 (b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and
the auditors are required to give a certificate separately for the same. So, in the above case the
auditor should not verify the PMS transactions till the Bank segregates the transactions from its
own investments.
172 (c) As per bank norms the drawing power need to be determined on the basis of stock statement and
it was more than three months old as on 31st March, 2022, so the outstanding in the account will
be deemed as irregular.
173 (d) ‘Others’ under ‘Other assets’.
174 (c) Net credit balance in branch adjustment accounts including these relating to foreign branches.
175 (d) Consider to downgrade the asset as per RBI prudential norms.
176 (c) This control should be reported as non-operating because segregation of duties was not present
with respect to the processing of payment transactions by the cashier.
177 (b) Debit balances in current account are reduced from aggregate demand deposits in balance sheet of
a bank.
178 (c) Statutory branch audit report as well as LFAR are to be submitted to Statutory Central auditors.
179 (d) The company meets the criteria of financial assets and income. An NBFC can only give demand
deposits but it cannot accept demand deposits. Hence in this case, the statutory auditors should
report regarding this matter.
180 (c) NBFC Company
181 (a) Provision should be made at 10%.
182 (a) The management of NBFC UVW Ltd. is correct in classifying the Balance Sheet items as financial
and non-financial as per requirement of Division III of Schedule III of Companies Act, 2013.
183 (a) ₹ 49.8 Lakh
184 (a) There has been breach of IRDAI guidelines and accordingly the management should respond.
185 (c) BIC Ltd should not have got this certification work done from their statutory auditors.
186 (b) KB & Associates can take up the audit if the firm is appointed by the CAG of India and should
ensure that they don’t take up audit of more than 3 insurance companies.
187 (b) No, non-training expenses have to be shown separately and incentives paid to employees should
be included in Employees’ Remuneration and Welfare Benefits Account.
188 (d) Facultative Reinsurance.
189 (a) Facultative Re-insurance.

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
190 (d) Stand of Nocri Ltd. is wrong as the C&AG may get involved in the audit of Nocri Ltd.
191 (a) The management’s stand is not correct. The C&AG may order test audit as per the requirements of
the Companies Act, 2013.
192 (b) The C&AG may conduct such type of audits in respect of NOP Ltd which would get covered in this
criteria, however, the notice for conducting such type of audit should give reasonable time to the
management to prepare themselves.
193 (c) Changes in audit programme in such type of audits can be accepted provided those are discussed
with the management and approved by the Competent Authority.
194 (b) Committee on Public Undertakings (COPU).
195 (c) Compliance audit.
196 (c) Financial audits.
197 (c) Compliance audit.
198 (d) It stands for verification of transactions on the tests of public interest, commonly accepted
customs and standards of conduct. This audit is directed towards an examination of managements
decisions in sales, purchases, contracts, etc.
199 (b) Both the management and auditors are not correct. The auditor is not supposed to receive the
report directly. Further, the auditor needs to review the work of the consultant irrespective of the
fact whether he received the report directly or not.
200 (d) M/s MNO & Co., being the auditors shall not suffer any disqualification on account of such business
transaction by Mr. M with audit client if Mr. M qualified as among the first 50 eligible customers as
per the marketing scheme and it can be demonstrated that PCL Limited has passed on similar 10%
inauguration discount to other 49 customers and further, the discount of 10% offered to Mr. M was
in the nature of routine commercial transaction, in the ordinary course of business of PCL Limited.
201 (d) Auditor should consider the documentation provided by the management i.e. the fixed deposit
certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should look to perform alternate procedures
and basis that the matter should be looked at.
202 (c) Auditor should ask the management to restate the financials to adjust the error. If financial
statements are not restated, auditor may modify his opinion on current year's financial statements
considering the materiality.
203 (c) Being a statutory non-compliance, the auditor is required to assess the significance of the matter
and should report the same in main report along with CARO.
204 (d) Check physical inventory of “A” class items as much as possible along with certain “B” class items
and certain “C” class items on sample basis in value wise descending order, compare the physical
stock with ERP system, and tabulate the result. The exercise should be continued till the end of
allotted time.
205 (a) Propriety audit is concerned with the scrutiny of executive decisions and actions affecting the
company’s financial situation. Huge expense has been done on construction of building and even
then, it was not used, which had a major impact on company’s profit and loss statement, hence
propriety audit is required.
206 (a) Audit evidence - 1, 2, 3, 4

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CA Final – Advanced Auditing & Professional Ethics
Part I – Multiple Choice Questions
207 (a) Include major suppliers with nil balances at the year-end.
208 (b) The approach of the auditors look reasonable in this case. The auditors found internal controls to
be satisfactory and also did not find any circumstance to arouse suspicion and hence they
performed their procedures on the basis of selected verification.
209 (a) Audit procedures 1,2,3
210 (d) The audit partner needs to assess the materiality of the figure, and the degree of subjectivity
involved. If it considers that safeguards like using separate personnel, could reduce the threat to
an acceptable level, then it can go ahead with both the audit and the training assignment.
211 (c) There should be full compliance of Schedule III and plant should be kept as CWIP as per Schedule
III.
212 (b) The difference in relation to AN Co. represents a timing difference and should be agreed to a pre-
year-end invoice.
213 (b) To ask the management registration documents of these properties and inspect and verify them.
214 (c) Inspect the invoices issued by Mr. B and the payments made.
215 (b) Recommend that the claim should be reduced, and clear guidelines should be issued to all
employees on the matter, with a provision for disciplinary action.
216 (b) The engagement team should understand the Power King Limited business environment and
should obtain knowledge about the laws and statutes applicable in this case.
217 (c) Poor corporate governance.
218 (c) 1 and 2 only.

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