03 Test Your Knowledge Booklet

TEST YOUR KNOWLEDGE
QUESTION BANK
1. “Choosing of appropriate accounting policies in relation to accounting issues is responsibility of
management”. Do you agree? Discuss duty of auditor, if any, in relation to accounting policies.
Answer:
The auditor determines whether the relevant information is properly disclosed in the financial
statements by:
a. Comparing the financial statements with the underlying accounting records and other source
data.
b. Considering the judgments that management has made in preparing the financial statements
c. The auditor assesses the selection and consistent application of accounting policies.
Choosing of appropriate accounting policies is responsibility of management. The role of auditor

lies in evaluating selection and consistent application of accounting policies by management .
(This question is related to the concept of scope of Audit)
2. Assurance engagements are not restricted to audit of financial statements alone. Discuss.
Answer:
MEANING OF ASSURANCE ENGAGEMENT

1. “Assurance engagement” means an engagement
a. in which a practitioner expresses a conclusion
b. designed to enhance the degree of confidence of the intended users
c. other than the responsible party
d. about the outcome of the evaluation or measurement of a subject matter against criteria.
2. It means that the practitioner gives an opinion about specific information due to which users
of information are able to make confident decisions knowing well that chance of information
being incorrect is diminished.
Hence Assurance engagement is not just restricted to audit of financial statements. It includes
various other engagements as well.
3. An assurance engagement involves a three party relationship. Discuss meaning of three parties
in such an engagement.
Answer:
Compilation of Test your knowledge | CA Mahamood Shaik 1

A three party relationship involving a practitioner, a responsible party, and intended users: An
assurance engagement involves abovesaid three parties.
a. A practitioner is a person who provides the assurance. The term practitioner is broader than
auditor. Audit is related to historical information whereas practitioner may provide assurance
not necessarily related to historical financial information.
b. A responsible party is the party responsible for preparation of subject matter.
c. Intended users are the persons for whom an assurance report is prepared. These persons may
use the report in making decisions.
4. A Chartered Accountant is specifically asked to check accounts whether fraud exists. State with
reasons whether it is an example of reasonable assurance engagement.
Answer:
Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance is a

complete assurance or a guarantee that financial statements are free from material
misstatements. However, reasonable assurance is not a complete guarantee. Although it is a high-
level of assurance but it is not complete assurance.
Hence in the given case, it is not a reasonable assurance engagement. It is in nature of
investigation.
5. An audit does not provide absolute assurance. Discuss how nature of audit procedures itself is
one of the reasons due to which audit cannot provide absolute assurance.
Answer:
Nature of Audit procedures:

a. The auditor carries out his work by obtaining audit evidence through performance of audit
procedures. However, there are practical and legal limitations on ability of auditor to obtain
audit evidence. For example,
i. Sampling: An auditor does not test all transactions and balances. He forms his opinion
only by testing samples. It is an example of practical limitation on auditor’s ability to
obtain audit evidence.
ii. Management may not provide complete information: Management may not provide
complete information as requested by auditor. There is no way by which auditor can
force management to provide complete information as may be requested by auditor.
In case he is not provided with required information, he can only report. It is an
example of legal limitation on auditor’s ability to obtain audit evidence.

iii. Sophisticated Frauds: The management may consist of dishonest and unscrupulous
people and may be, itself, involved in fraud. It may be engaged in concealing fraud by
designing sophisticated and carefully organized schemes which may be hard to detect
by the auditor. It may produce fabricated documents before auditor to lead him to
believe that audit evidence is valid. However, in reality, such documents could be fake
or non-genuine.
iv. Related party transactions: It is quite possible that entity may have entered into some
transactions with related parties. Such transactions may be only paper transactions
and may not have actually occurred. The auditor may not be aware of such related
party relationships or audit procedures may not be able to detect probable wrong
doings in such transactions.
(This question is related to the concept of Inherent limitations)
6. Briefly outline how principles-based approach differs from rules-based approach to ethics.
Answer:
1. Ethical guidance may follow principles-based approach or rules-based approach.

2. Principal based approach:
a. The essence of principles-based approach to ethics is that it requires compliance with
spirit of ethics.
b. It requires accountants to exercise professional judgment in every situation based upon
their professional knowledge, skill and expertise.
c. It requires that accountants should use professional judgment to evaluate every situation
to arrive at conclusions.
3. Rule based approach:
a. However, rules-based approach to ethics strictly follows clearly established rules.
b. It may lead to a narrow outlook and spirit of ethics may be overlooked while strictly
adhering to rules.
c. Further, rules- based approach is somewhat rigid as it may not be possible to deal with
every practical situation relying upon rules. d. Therefore, it is necessary that spirit of code
is followed.
7. How application of professional skepticism throughout audit is helpful in reducing audit risk?
Answer:
1. MEANING: Professional skepticism refers to 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 audit evidence.
2. CIRCUMSTANCES TO WHICH AUDITOR SHOULD REMAIN ALERT: Professional skepticism
includes being alert to, for example:
a. Audit evidence that contradicts other audit evidence obtained.
b. Information that brings into question the reliability of documents and responses to inquiries
to be used as audit evidence.
c. Conditions that may indicate possible fraud.
3. PROFESSIONAL SKEPTICISM REDUCES RISKS: Maintaining professional skepticism throughout

the audit is necessary if the auditor is to reduce the risks of:
a. Overlooking unusual circumstances.
b. Over generalising when drawing conclusions from audit observations.
c. Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
8. A Chartered accountant is conducting audit of a client for last two years. Before proceeding to
start audit for next year, he notices that there is substantial change in management. Besides,
client has ventured into areas of business activity which were not present at time of accepting
initial audit engagement. Discuss responsibility of auditor in this regard in context of SA 210.
Answer:
1. On recurring audits, the auditor shall assess whether circumstances require the terms of the
audit engagement to be revised and whether there is a need to remind the entity of the
existing terms of the audit engagement.
2. The auditor may decide not to send a new audit engagement letter or other written
agreement each period.
3. However, the following factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:
• Any indication that the entity misunderstands the objective and scope of the audit.
• Any revised or special terms of the audit engagement.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation of the financial
statements.
• A change in other reporting requirements.

1. Discuss some of circumstances when work of the internal auditor cannot be used by external
auditor.
Answer:
The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
a. Involve making significant judgments in the audit.
b. Relate to higher assessed risks of material misstatement where in depth audit procedures are
required.
c. Relate to work with which the internal auditors have been involved.
2. “The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.” Explain
Answer:
The auditor shall form an opinion on whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework. In order to form that
opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance
about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error. That conclusion shall take into account:
(a) Whether sufficient appropriate audit evidence has been obtained;
(b) Whether uncorrected misstatements are material, individually or in aggregate;
(c) The evaluations
3. “The auditor shall evaluate whether the financial statements are prepared, in all material
respects, in accordance with the requirements of the applicable financial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgements.” Discuss stating
clearly qualitative aspects of the entity’s accounting practices.
Answer:
Qualitative aspects of the entity’s accounting practices:

a. Management makes a number of judgements about the amounts and disclosures in the
financial statements.
b. In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgements.

c. The auditor may conclude that lack of neutrality together with uncorrected misstatements
causes the financial statements to be materially misstated.
d. Indicators of a lack of neutrality include the following:
i. The selective correction of misstatements brought to management’s attention during
the audit. For example, Correcting misstatements with the effect of increasing
reported earnings, but not correcting misstatements that have the effect of decreasing
reported earnings.
ii. Possible management bias in the making of accounting estimates.
4. Discuss the factors affecting the decision of the auditor regarding which type of modified
opinion is appropriate.
Answer:
Factors in deciding the type of modified opinion: The decision regarding which type of modified
opinion is appropriate depends upon:
1. The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient appropriate
audit evidence, may be materially misstated (availability or non-availability of audit evidence);
and
2. The auditor’s judgement about the pervasiveness of the effects or possible effects of the matter
on the financial statements.
5. Discuss the objective of the auditor as per Standard on Auditing (SA) 705 “Modifications to The
Opinion in The Independent Auditor’s Report”.
Answer:
The auditor shall modify the opinion in the auditor’s report in the following circumstances:
a. The auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or
b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
6. n considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgements. The auditor may conclude that
lack of neutrality together with uncorrected misstatements causes the financial statements to
be materially misstated. Explain and analyse the indicators of lack of neutrality with examples,
wherever required.

Answer:
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become
aware of possible bias in management’s judgements. The auditor may conclude that lack of
neutrality together with uncorrected misstatements causes the financial statements to be
materially misstated.
Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s attention during the
audit.
Example
• Correcting misstatements with the effect of increasing reported earnings, but not
correcting misstatements that have the effect of decreasing reported earnings.
• The combination of several deficiencies affecting the same significant account or
disclosure (or the same internal control component) could amount to a significant
deficiency (or material weakness if required to be communicated in the jurisdiction).
This evaluation requires judgement and involvement of audit executives.
(ii) Possible management bias in the making of accounting estimates.
7. The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.” The Opinion section of the auditor’s report shall also identify the entity
whose financial statements have been audited. Apart from the above, explain the other
relevant points to be included in opinion section.
Answer;
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.” The Opinion section of the auditor’s report shall also:
a. Identify the entity whose financial statements have been audited;
b. State that the financial statements have been audited;
c. Identify the title of each statement comprising the financial statements;
d. Refer to the notes, including the summary of significant accounting policies; and
e. Specify the date of, or period covered by, each financial statement comprising the financial
statements.
8. Define Emphasis of Matter Paragraph and how it should be disclosed in the Independent
Auditor's Report?
Answer:
Emphasis of Matter paragraph: A paragraph included in the auditor’s report that refers to a
matter appropriately presented or disclosed in the financial statements that, in the auditor’s

judgement, is of such importance that it is fundamental to users’ understanding of the financial
statements.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall:
(i) Include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”;
(ii) Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or disclosed in the financial
statements; and
(iii) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
9. "An auditor is required to make specific evaluations while forming an opinion in an audit
report." State those evaluations.
Answer:
Specific Evaluations by the auditor: In particular, the auditor shall evaluate whether :
(i) The financial statements adequately disclose the significant accounting policies selected
and applied;
(ii) The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
(iii) The accounting estimates made by management are reasonable;
(iv) The information presented in the financial statements is relevant, reliable, comparable,
and understandable;
(v) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in
the financial statements; and
(vi) The terminology used in the financial statements, including the title of each financial
statement, is appropriate
10. The auditor’s report shall include a section with a heading “Responsibilities of Management for
the Financial Statements.” SA 200 explains the premise, relating to the responsibilities of
management and, where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Explain.
Answer:
RESPONSIBILITIES OF MANAGEMENT FOR THE FINANCIAL STATEMENTS: This section of the

auditor’s report shall describe management’s responsibility for:

a. Preparing the financial statements in accordance with the applicable financial reporting
framework, and
b. For such internal control as management determines is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or
error.
c. Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating
to going concern.
d. Oversight of the financial reporting process: This section of the auditor’s report shall also
identify those responsible for the oversight of the financial reporting process. This section
shall also include reference to ‘Those Charged With Governance.’
11. Communicating Key Audit Matter is not a substitute for disclosure in the Financial Statements
rather Communicating key audit matters in the auditor’s report is in the context of the Auditor
having formed an opinion on the financial statements as a whole. Analyse.
Answer:
1. The purpose of communicating key audit matters is to enhance the communicative value of
the auditor’s report by providing greater transparency about the audit that was performed.
2. Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters of most significance in the
audit of the financial statements of the current period.
3. Communicating key audit matters in the auditor’s report is Communicating key audit matters
in the auditor’s report is
a. Not a substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make.
b. Not a substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705
c. Not a substitute for reporting in accordance with SA 570 when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity’s ability to
continue as a going concern; or
d. Not a separate opinion on individual matters.
12. The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”. Explain what is included in this “Basis for Opinion” section.
Answer:
Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:

(a) States that the audit was conducted in accordance with Standards on Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under
the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
13. Distinguish between an adverse opinion and a qualified opinion. Also draft an opinion
paragraph for both types of opinion.
Answer:
An auditor shall express an adverse opinion, when the auditor having obtained sufficient and
appropriate audit evidence, concludes that misstatements, individually or in aggregate are both
material and pervasive.
Whereas, when the auditor, having obtained sufficient and appropriate audit evidence, concludes
that misstatements are material but not pervasive, shall express a qualified opinion.
SA705 – “Modifications To The Opinion In The Independent Auditor’s Report” deals with the form
and content of both types of report. The following are the draft of the opinion paragraphs of the
reports.
Adverse Opinion
We have audited the accompanying consolidated financial statements of ABC Company Limited
(hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding Company and
its subsidiaries together referred to as “the Group”), its associates and jointly controlled entities,
which comprise the consolidated balance sheet as at March 31, 2021, the consolidated statement
of profit and Loss, (consolidated statement of changes in equity) and the consolidated statement
of cash flows for the year then ended, and notes to the consolidated financial statements,
including a summary of significant accounting policies (hereinafter referred to as the
“consolidated financial statements”). In our opinion and to the best of our information and
according to the explanations given to us, because of the significance of the matter discussed in
the Basis for Adverse Opinion section of our report, the accompanying consolidated financial
statements do not give a true and fair view in conformity with the accounting principles generally
accepted in India, of their consolidated state of affairs of the Group, its associates and jointly
controlled entities, as at March 31, 2021, of its consolidated profit/loss, (consolidated position of
changes in equity) and the consolidated cash flows for the year then ended.
Qualified Opinion

We have audited the standalone financial statements of ABC Company Limited (“the Company”),
which comprise the balance sheet as at March 31, 2021, and the statement of Profit and Loss,
(statement of changes in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies and other
explanatory information (in which are included the Returns for the year ended on that date
audited by the branch auditors of the Company’s branches located at (location of branches)) . In
our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our
report, the aforesaid financial statements give a true and fair view in conformity with the
accounting principles generally accepted in India, of the state of affairs of the Company as at
March 31st, 2021 and profit/loss, (changes in equity) and its cash flows for the year ended on that
date.
14. ABC Ltd is a company incorporated in India. It has branches within and outside India. Explain
who can be appointed as an auditor of these branches within and outside India. Also explain to
whom branch auditor is required to report.
Answer:
Sub-section (8) of section 143 of the Companies Act, 2013, prescribes the duties and powers of
the company’s auditor with reference to the audit of the branch and the branch auditor. Where a
company has a branch office, the accounts of that office shall be audited either by the auditor
appointed for the company (herein referred to as the company's auditor) under this Act or by any
other person qualified for appointment as an auditor of the company under this Act and
appointed as such under section 139, or where the branch office is situated in a country outside
India, the accounts of the branch office shall be audited either by the company's auditor or by an
accountant or by any other person duly qualified to act as an auditor of the accounts of the branch
office in accordance with the laws of that country and the duties and powers of the company' s
auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as
may be prescribed:
It may be noted that the branch auditor shall prepare a report on the accounts of the branch
examined by him and send it to the auditor of the company who shall deal with it in his report in
such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch auditor shall
submit his report to the company’s auditor and reporting of fraud by the auditor shall also extend
to such branch auditor to the extent it relates to the concerned branch.

15. Before the commencement of the audit, the joint auditors should discuss and develop a joint
audit plan. In developing the joint audit plan, the joint auditors should identify division of audit
areas and common audit areas. Explain stating the other relevant considerations in this regard.
Answer:
Before the commencement of the audit, the joint auditors should discuss and develop a joint audit
plan. In developing the joint audit plan, the joint auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that are significant in directing
the engagement team’s efforts;
(d) consider the results of preliminary engagement activities, or similar engagements performed
earlier.
(e) ascertain the nature, timing and extent of resources necessary to accomplish the engagement.
16. The practice of appointing Chartered Accountants as joint auditors is quite widespread in big
companies and corporations. Explain stating the advantages of the joint audit.
Answer:
Joint Audit: The practice of appointing Chartered Accountants as joint auditors is quite
widespread in big companies and corporations. Joint audit basically implies pooling together the
resources and expertise of more than one firm of auditors to render an expert job in a given time
period which may be difficult to accomplish acting individually. It essentially involves sharing of
the total work. This is by itself a great advantage.
In specific terms the advantages that flow may be the following:

(i) Sharing of expertise.
(ii) Advantage of mutual consultation.
(iii) Lower workload.
(iv) Better quality of performance.
(v) Improved service to the client.
(vi) In respect of multi-national companies, the work can be spread using the expertise of the
local firms which are in a better position to deal with detailed work and the local laws and
regulations.
(vii) Lower staff development costs.
(viii) Lower costs to carry out the work. (ix)
(ix) A sense of healthy competition towards a better performance

17. Discuss the reporting requirements under CARO 2020, with respect to the moneys raised by the
company by way of initial public offer or further public offer and where the company has made
any preferential allotment or private placement of shares.
Answer:
The following are the disclosure requirements as per CARO 2020, with respect to the moneys
raised by the company by way of initial public offer or further public offer and where the company
has made any preferential allotment or private placement of shares.
(a) whether moneys raised by way of initial public offer or further public offer (including debt
instruments) during the year were applied for the purposes for which those are raised, if not,
the details together with delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(b) whether the company has made any preferential allotment or private placement of shares or
convertible debentures (fully, partially or optionally convertible) during the year and if so,
whether the requirements of section 42 and section 62 of the Companies Act, 2013 have been
complied with and the funds raised have been used for the purposes for which the funds were
raised, if not, provide details in respect of amount involved and nature of noncompliance;
18. Discuss which class of companies are specifically exempt from the applicability of CARO 2020?
Answer:
CARO 2020 shall apply to every company including a foreign company as defined in clause (42) of
section 2 of the Companies Act, 2013, except–
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause (62) of section 2 of the Companies Act and
(v) a small company as defined in clause (85) of section 2 of the Companies Act; and
(vi) a private limited company, not being a subsidiary or holding company of a public company,
having a paid up capital and reserves and surplus not more than one crore rupees as on
the balance sheet date and which does not have total borrowings exceeding one crore
rupees from any bank or financial institution at any point of time during the financial year
and which does not have a total revenue as disclosed in Scheduled III to the Companies
Act (including revenue from discontinuing operations) exceeding ten crore rupees during
the financial year as per the financial statements.

Discuss, in what circumstances, Central Registrar can hold an inquiry into working and financial
condition of a multi-state cooperative society.
Answer:
ELIGIBILITY TO MAKE AN APPLICATION FOR INQUIRY:

a. A creditor or
b. Not less than one-third of the members of the board or
c. Not less than one-fifth of the total number of members of a multi-state co-operative society
AUTHORITY TO WHOM THE APPLICATION IS TO BE MADE: The Central Registrar.
INQUIRY BY WHOM:
a. Either by the registrar himself or
b. Some other person authorized by him

1. Discuss what is understood by “appropriateness” of audit evidence.
Answer:
1. Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
2. The reliability of evidence is influenced by its source and by its nature, and is dependent on
the individual circumstances under which it is obtained.
3. Relevance deals with the logical connection with, or bearing upon, the purpose of the audit
procedure and, where appropriate, the assertion under consideration.
Example, If the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant audit
procedure. On the other hand, when testing for understatement in the existence or valuation
of accounts payable, testing the recorded accounts payable would not be relevant, but testing
such information as subsequent disbursements, unpaid invoices, suppliers’ statements, and
unmatched receiving reports may be relevant.
2. Maintaining accounts using accounting software having a feature of recording audit trail can be
useful for an auditor. Discuss some of the advantages for such a feature in accounting software
for auditors.
Answer:
ADVANTAGES OF AUDIT TRAIL:

1. Audit trails help in maintaining record of system and user activity. For example, in case of
banks, there is an audit trail keeping track of log-on activity detailing record of log-on attempts
and device used.
2. It is a step-by-step record by which accounting, trade details, or other financial data can be
traced to their source.
3. Audit trails help to enhance internal controls and data security.
4. Audit trails can help in fixing responsibility, rebuilding events and in thorough analysis of
problem areas.
5. Audit trail analysis can specify reason of the problem.
6. It can also help in ensuring operation of system as intended.
7. In this way, audit trails can help entities in their regular system operations.
3. Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating
audit evidence. Explain

Answer:
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature
and is primarily obtained from audit procedures performed during the course of the audit. It may,
however, also include information obtained from other sources such as previous audits. In
addition to other sources inside and outside the entity, the entity’s accounting records are an
important source of audit evidence. Also, information that may be used as audit evidence may
have been prepared using the work of a management’s expert. Audit evidence comprises both
information that supports and corroborates management’s assertions, and any information that
contradicts such assertions. In addition, in some cases the absence of information (for example,
management’s refusal to provide a requested representation) is used by the auditor, and
therefore, also constitutes audit evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating
audit evidence. Audit procedures to obtain audit evidence can include inspection, observation,
confirmation, recalculation, re performance and analytical procedures, often in some
combination, in addition to inquiry. Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry alone ordinarily does not provide sufficient
audit evidence of the absence of a material misstatement at the assertion level, nor of the
operating effectiveness of controls.
As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”, reasonable assurance is obtained when the
auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that
the auditor expresses an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level. The sufficiency and appropriateness of audit evidence are
interrelated.
4. What is meant by sufficiency of Audit Evidence? Explain the factors affecting the auditor’s
judgement as to the sufficiency of audit evidence.
Answer:
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor’s assessment of the risks of misstatement (the higher the
assessed risks, the more audit evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence,
however, may not compensate for its poor quality.
Following are the factors affecting the auditor’s judgement as to the sufficiency of audit evidence:
(a) Materiality: It may be defined as the significance of classes of transactions, account balances
and presentation and disclosures to the users of the financial statements. Less evidence would be
required in case assertions are less material to users of the financial statements. But on the other

hand if assertions are more material to the users of the f inancial statements, more evidence
would be required.
(b) Risk of material misstatement: It may be defined as the risk that the f inancial statements are
materially misstated prior to audit. This consists of two components described as follows at the
assertion level:
➢ Inherent risk—The susceptibility of an assertion to a misstatement that could be material
before consideration of any related controls.
➢ Control risk—The risk that a misstatement that could occur in an assertion that could be
material will not be prevented or detected and corrected on a timely basis by the entity’s internal
control.
Less evidence would be required in case assertions that have a lower risk of material
misstatement. But on the other hand, if assertions have a higher risk of material misstatement,
more evidence would be required.
(c) Size of a population: It refers to the number of items included in the population. Less evidence
would be required in case of smaller, more homogeneous population but on the other hand in
case of larger, more heterogeneous populations, more evidence would be required.
5. The form, content and extent of audit documentation depends upon number of factors. List out
any four such factors.
Answer:
FORM OF AUDIT DOCUMENTATION: The auditor shall prepare audit documentation that is
sufficient to enable an experienced auditor, having no previous connection with the audit, to
understand:
1. The nature, timing and extent of the audit procedures performed.
2. The results of the audit procedures performed and the audit evidence obtained and
3. Significant matters arising during the audit and the conclusions reached thereon and significant
professional judgements made in reaching those conclusions.
FACTORS WHICH EFFECT THE FORM AND CONTENT OF AUDIT DOCUMENTATION: The form,
content and extent of audit documentation depend on factors such as:
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.
6. The audit methodology and tools used.

6. Discuss any two purposes of audit documentation.
Answer:
PURPOSE OF AUDIT DOCUMENTATION:

The following are the purpose of Audit documentation:
1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team to direct and supervise the audit work, and to
discharge their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
6. Enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements.
7. Define audit documentation. Also give some examples.
Answer:
MEANING: Audit Documentation refers to the record of

1. Audit procedures performed,
2. Relevant audit evidence obtained, and
3. Conclusions the auditor reached.
CONTENTS OF AUDIT DOCUMENTATION: Audit Documentation include

1. Audit programmes
2. Analyses
3. Issues memoranda
4. Summaries of significant matters
5. Letters of confirmation and representation
6. Checklists
7. Correspondence (including e-mail) concerning significant matters.
8. Who performed the audit work and the date such work was completed; and
9. Who reviewed the audit work performed and the date and extent of such review.
8. “Audit documentation summary may facilitate effective and efficient reviews and inspections
of the audit documentation, particularly for large and complex audits”. Explain.
Answer:

1. The auditor may consider it helpful to prepare and retain as part of the audit documentation
a summary (sometimes known as a completion memorandum) that describes-
a. the significant matters identified during the audit and
b. how they were addressed.
2. It is particularly maintained for large and complex audits.
3. Further, the preparation of such a summary may assist auditor’s consideration of the
significant matters.
4. It may also help the auditor to consider whether the objectives of all relevant SA’s are
complied with.

1. Discuss how “analytical procedures” performed as “risk assessment procedures” can be useful
to an auditor.
Answer:
ANALYTICAL PROCEDURES:
a. Analytical procedures performed as risk assessment procedures may help the auditor identify
aspects of the entity may assist in assessing the risks of material misstatement.
b. Analytical procedures performed as risk assessment procedures may include both financial
and non-financial information.
c. Unusual or unexpected relationships that are identified may assist the auditor in identifying
risks of material misstatement, especially risks of material misstatement due to fraud.
2. What is understood by “non-routine” transactions? Briefly outline why risks of material

misstatement is greater for such transactions.
Answer:
Risks of material misstatement may be greater for significant non-routine transactions arising
from matters such as the following:
1. Greater management intervention to specify the accounting treatment.
2. Greater manual intervention for data collection and processing.
3. Complex calculations or accounting principles.
4. The nature of non-routine transactions, which may make it difficult for the entity to implement
effective controls over the risks.
3. The auditor shall obtain an understanding of the major activities that the entity uses to monitor
internal control over financial reporting” Explain.
Answer:
1. DEFINITION: Monitoring of controls is a process to assess the effectiveness of internal control

performance over time.
2. ASSESSING THE EFFECTIVENESS OF CONTROLS ON A TIMELY BASIS: It involves assessing the

effectiveness of controls on a timely basis and taking necessary remedial actions.
3. MANAGEMENT ACCOMPLISHES THROUGH ON-GOING ACTIVITIES OR SEPARATE

EVALUATIONS: Management accomplishes monitoring of controls through on-going activities,

separate evaluations, or a combination of the two. On-going monitoring activities are often
built into the normal recurring activities of an entity and include regular management and
supervisory activities.
4. MANAGEMENT’S MONITORING ACTIVITIES INCLUDE: Management's monitoring activities

may include using information from communications from external parties such as customer
complaints and regulator comments that may indicate problems or highlight areas in need of
improvement.
5. IN CASE OF SMALL ENTITIES: Management s monitoring of control is often accomplished by

managements or the owner-manager's close involvement in operations. This involvement
often will identify significant variances from expectations and inaccuracies in financial data
leading to remedial action to the control.
6. MONITORING OF CONTROLS- IF THE ENTITY HAS AN INTERNAL AUDIT FUNCTION: If the

entity has an internal audit function, the auditor shall obtain an understanding of the
following:
a. The internal audit function’s responsibilities and how the internal audit function fits in the
entity’s organisational structure; and
b. The activities performed, or to be performed, by the internal audit function.
4. “Risk of material misstatement consists of two components” Explain clearly defining risk of
material misstatement./ “The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material misstatement””
Explain
Answer:
RISK OF MMS: The risk that the financial statements are materially misstated prior to audit. This
consists of two components namely inherent risk and control risk. Further the Risk of MMS is an
entity's risk and will exist irrespective of audit of financial statements.
a. Inherent Risk:
i. The risk of that a transaction or balance could be materially misstated before considering the
related internal control system.
ii. Absence of related control is also termed as inherent risk. iii. Inherent risk is generally
unavoidable and inherent in the system.
b. Control Risk:
i. The risk that the internal control system, fails to prevent, detect or correct a misstatement on a
timely basis.
ii. Control Risk is a risk that internal control existing and operating in an entity would not be
efficient enough to stop from happening, or find and then rectify in an appropriate time, any
material misstatement relating the financial statements of that entity.

iii. This risk is also termed as control weakness or control deficiency. iv. There exists an inverse
relation between Control Risk and Efficiency of Internal Control of an Entity.
5. The auditor shall obtain an understanding of the control environment” Explain stating what is
included in control environment.
Answer:
THE AUDITOR SHALL EVALUATE WHETHER:

a. Management has created and maintained a culture of honesty and ethical behavior;
b. Control environment provides appropriate foundation for other components
ELEMENTS OF CONTROL ENVIRONMENT:

a. Communication and enforcement of integrity and ethical values
b. Commitment to competence: How the management decides the competence levels for
particular jobs.
c. Participation by those charged with governance: Evaluate the roles of those charged with
governance such as:
i. Their independence from management
ii. Their experience
iii. Extent of their involvement and scrutiny of activities
iv. Appropriateness of their actions and degree to which questions are raised with
management
d. Management’s philosophy and operating style: Characteristics such as management's
i. Approach to taking and managing business risks
ii. Attitudes and actions toward financial reporting
iii. Attitudes toward information processing and accounting functions and personnel
e. Organizational structure: Framework within which an entity operates.
f. Assignment of authority and responsibility: How operating activities are assigned, and
authorization hierarchies are established.
6. Internal control over safeguarding of assets against unauthorised acquisition, use, or disposition
may include controls relating to both financial reporting and operations objectives. Explain
stating clearly the objectives of Internal Control.
Answer:
1. MEANING: As per SA-315, , the internal control may be defined as “the process designed,
implemented and maintained by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of an entity’s objectives.

2. OBJECTIVES OF INTERNAL CONTROL: Internal controls are implemented to achieve the
following objectives:
a. The reliability of the entity’s financial reporting;
b. The effectiveness and efficiency of its operations;
c. Its compliance with applicable laws and regulations; and
d. Safeguarding of assets.

1. How does SQC 1 ensure that independence in engagements is not breached by an audit firm?
Answer:
Observance of “Independence” in all engagements is the basic requirement. The firm should
establish policies and procedures designed to provide it with reasonable assurance that the firm,
its personnel and (including experts contracted by the firm and network firm personnel) maintain
independence where required by the Code. Such policies and procedures should enable the firm
to: -
(a) Communicate its independence requirements to its personnel
(b) Identify and evaluate circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the engagement.
2. An engagement partner takes overall responsibility for maintaining audit quality in an audit
engagement in accordance with SA 220. What are his objectives in taking and emphasizing such
responsibility?
Answer:
LEADERSHIP RESPONSIBILITIES FOR QUALITY WITHIN THE FIRM:

a. As per SA 220, the engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned.
b. The actions of the engagement partner and appropriate messages to the other members of
the engagement team, in taking responsibility for the overall quality on each audit
engagement, emphasise the importance of:
i. Performing work that complies with professional standards and regulatory and legal
requirements;
ii. Complying with the firm’s quality control policies and procedures as applicable;
iii. Issuing auditor’s reports that are appropriate in the circumstances; and
iv. The engagement team’s ability to raise concerns without fear of reprisals; and
v. The fact that quality is essential in performing audit engagements.
3. Many related party transactions are in the normal course of business. However, the nature of
related party relationships and transactions may, in some circumstances, give rise to higher risks
of material misstatement of the financial statements than transactions with unrelated parties.
Give few examples of such areas.
Answer:

1. Many related party transactions are in the normal course of business. In such circumstances,
they may carry no higher risk of material misstatement of the financial statements than similar
transactions with unrelated parties.
2. However, the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial statements than
transactions with unrelated parties. Examples are as follows:
a. Related parties may operate through an extensive and complex range of relationships and
structures, with a corresponding increase in the complexity of related party transactions.
b. Information systems may be ineffective at identifying or summarising transactions and
outstanding balances between an entity and its related parties.
c. Related party transactions may not be conducted under normal market terms and
conditions; for example, some related party transactions may be conducted with no
exchange of consideration.
4. An auditor is appointed for the first time for audit of accounts of an entity. The accounts of
previous year were unaudited. He is unable to obtain sufficient appropriate audit evidence
regarding the opening balances. What is his responsibility in this regard?
Answer:
1. If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not
properly accounted for or not adequately presented or disclosed, the auditor shall express a
qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705.
2. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate,
in accordance with SA 705.
5. Discuss the objective of Auditor with respect to Opening balances in conducting an initial audit
engagement./ M/s PQR and associates are the statutory auditors of TUV Ltd. for the FY 2022-
23-. They have been appointed as statutory auditors of TUV Ltd. for the first time. What is the
objective of the engagement partner in terms of SA 510?
Answer:
In conducting an initial audit engagement, the objective of the auditor with respect to opening
balances is to obtain sufficient appropriate audit evidence about whether:
1. Opening balances contain misstatements that materially affect the current period’s financial
statements; and
2. Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes thereto are properly accounted

for and adequately presented and disclosed in accordance with the applicable financial reporting
framework.
6. M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC
Limited. CA Pankaj did not apply any audit procedures regarding opening balances. He argued
that since financial statements were audited by the predecessor auditor therefore he is not
required to verify them. Is CA Pankaj correct in his approach?
Answer:
Initial audit engagement is an engagement in which either:

(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a predecessor auditor.
From the above, it is quite clear that CA Pankaj is not correct in his approach and therefore would
be required to follow the initial audit engagement and also apply audit procedures regarding
opening balances.
Audit Procedures regarding Opening Balances; The auditor shall read the most recent financial
statements, if any, and the predecessor auditor’s report thereon, if any, for information relevant
to opening balances, including disclosures. The auditor shall obtain sufficient appropriate audit
evidence about whether the opening balances contain misstatements that materially affect the
current period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been correctly brought forward
to the current period or, when appropriate, any adjustments have been disclosed as prior
period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
(c) Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing the copies of the
audited financial statements including the other relevant documents relating to the
prior period financial statements;
(ii) Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening
balances.
7. When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests including sending the requests, including follow-up requests when
applicable, to the confirming party. Explain the other points as to when using external
confirmation procedures, the auditor would be required to maintain control over external
confirmation requests.

Answer:
When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests, including:
(a) Determining the information to be confirmed or requested;
(b) Selecting the appropriate confirming party;
(c) Designing the confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to the auditor; and
(d) Sending the requests, including follow-up requests when applicable, to the confirming party.
8. Explain clearly the examples of matters relevant in planning attendance at physical inventory
counting.
Answer;
Matters relevant in planning attendance at physical inventory counting include, for example:
(a) Nature of inventory.
(b) Stages of completion of work in progress.
(c) The risks of material misstatement related to inventory.
(d) The nature of the internal control related to inventory.
(e) Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting.
(f) The timing of physical inventory counting.
(g) Whether the entity maintains a perpetual inventory system.
(h) The locations at which inventory is held, including the materiality of the inventory and the
risks of material misstatement at different locations, in deciding at which locations attendance
is appropriate
(i) Whether the assistance of an auditor’s expert is needed.
9. List out some matters that the auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a “significant deficiency”.
Answer:
EXAMPLES OF MATTERS THAT THE AUDITOR MAY CONSIDER IN DETERMINING WHETHER A

DEFICIENCY OR COMBINATION OF DEFICIENCIES IN INTERNAL CONTROL CONSTITUTES A
SIGNIFICANT DEFICIENCY
a. The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
b. The susceptibility to loss or fraud of the related asset or liability.

c. The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.
d. The financial statement amounts exposed to the deficiencies.
e. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
10. In what ways an effective two-way communication between auditor and those charged with
governance is important?
Answer:
The objectives of the auditor are: -

a. To communicate clearly with those charged with governance the responsibilities of the auditor
in relation to the financial statement audit, and an overview of the planned scope and timing
of the audit;
b. To obtain from those charged with governance information relevant to the audit;
c. To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting
process and
d. To promote effective two-way communication between the auditor and those charged with
governance.
11. The auditor of a company is having concerns about following of going concern basis of
accounting followed by management for preparation of financial statements. It asks the
management to justify preparation of financial statements. However, management is not
willing to make its assessment and share with auditor. What are implications for auditor’s report
in such a scenario?
Answer:
IMPACT ON AUDITORS OPINION IF MANAGEMENT IS UNWILLING TO MAKE OR EXTEND ITS

ASSESSMENT: If management is unwilling to make or extend its assessment when requested to
do so by the auditor, the auditor shall consider issuing, a qualified opinion or a disclaimer of
opinion in the auditor’s report may be appropriate, because it may not be possible for the auditor
to obtain sufficient appropriate audit evidence regarding management’s use of the going concern
basis of accounting in the preparation of the financial statements.
12. Discuss documentation requirements for an auditor regarding misstatements identified during
audit under SA 450.

Answer:
DOCUMENTATION REGARDING MISSTATEMENTS IDENTIFIED DURING AUDIT: The audit

documentation shall include: -
1. The amount below which misstatements would be regarded as clearly trivial;
2. All misstatements accumulated during the audit and whether they have been corrected; and
3. The auditor’s conclusion as to whether uncorrected misstatements are material, individually or
in aggregate, and the basis for that conclusion.
13. Discuss meaning of “Date the financial statements are issued” under SA 560.
Answer:
Date the financial statements are issued: The date that the auditor’s report and audited financial
statements are made available to third parties.

1. Discuss relationship between “General IT controls” and “application controls” in an automated
environment.
Answer:
GENERAL IT CONTROLS VS. APPLICATION CONTROLS: These two categories of control over IT
systems are interrelated. The relationship between the application controls and the General IT
Controls is such that General IT Controls are needed to support the functioning of application
controls, and both are needed to ensure complete and accurate information processing through
IT systems.
2. A company functions in an automated environment. Discuss in what areas data analytics can
be useful for auditor of the company.
Answer:
USE OF DATA ANALYTICS IN AUDIT: Data analytics can be used in testing of electronic records and
data residing in IT systems using spreadsheets and specialised audit tools viz., IDEA and ACL to
perform the following:
1. Check completeness of data and population that is used in either test of controls or
substantive audit tests.
2. Selection of audit samples – random sampling, systematic sampling.
3. Re-computation of balances – reconstruction of trial balance from transaction data.
4. Reperformance of mathematical calculations – depreciation, bank interest calculation.
5. Analysis of journal entries as required by SA 240.
6. Fraud investigation.
7. Evaluating impact of control deficiencies.

1. Discuss how performing preliminary engagement activities as part of planning an audit assists
auditor.
Answer:
The following activities are included in preliminary engagement activities:

a. Performing procedures required by SA 220, “Quality Control for an Audit of Financial
Statements” regarding the continuance of the client relationship and the specific audit
engagement.
b. Evaluating compliance with ethical requirements, including independence, as required by SA
220;
c. Establishing an understanding of the terms of the engagement, as required by SA 210 and
d. Communicating with the predecessor auditor, if applicable.
Performing preliminary engagement activities assists the auditor in identifying and evaluating
events or circumstances that may affect auditor’s ability to plan and perform audit engagement.
2. Discuss how an engagement partner ensures that firm complies with relevant ethical
requirements including independence in relation to client.
Answer:
a. The auditor shall continuously evaluate compliance with ethical requirements including
independence.
b. “Independence” means that the judgement of a person is not subordinate to the wishes or
direction of another person who might have engaged him.
c. Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant
ethical requirements by members of the engagement team.
d. If matters come to the engagement partner’s attention that indicate that members of the
engagement team have not complied with relevant ethical requirements, the engagement
partner, in consultation with others in the firm, shall determine the appropriate a ction.
e. The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the engagement partner shall:
(i) Obtain relevant information from the firm to identify and evaluate circumstances and
relationships that create threats to independence.
(ii) Evaluate information on identified breaches, if any, of the firm’s independence policies
and procedures to determine whether they create a threat to independence for the
audit engagement and
(iii) Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or regulation. The engagement
partner shall promptly report to the firm any inability to resolve the matter for
appropriate action.
3. “Purported disadvantages of an audit programme can be overcome”. Do you agree?
Answer:
Purported disadvantages of audit programme may be eliminated by imaginative supervision of
the work carried on by the assistants; the auditor must have a receptive attitude as regards the
assistants; the assistants should be encouraged to observe matters o bjectively and bring
significant matters to the notice of supervisor/principal.
4. An auditor of a company fails to document audit strategy and audit plan. Briefly outline
consequences of such failure.
Answer:
1. The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the
engagement team. 2.
2. The auditor may summarize the overall audit strategy in the form of a memorandum that
contains key decisions regarding the overall scope, timing and conduct of the audit.
3. The auditor shall document the following:
a. the overall audit strategy;
b. the audit plan; and
c. any significant changes made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.
d. A summary of discussions with the entity’s key decision makers.
e. Other communications or agreements with management or those charged with
governance regarding the scope, or changes in scope, of our services.
f. Auditor’s report on the entity’s financial statements.
5. SA 300 states that auditor shall plan the nature, timing and extent of direction and supervision
of engagement team members and the review of their work. Discuss few factors affecting such
supervision and review of work of engagement team members.
Answer:
1. The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work.
2. The nature, timing and extent of the direction and supervision of engagement team members
and review of their work vary depending on many factors, including:
a. The size and complexity of the entity.
b. The area of the audit.

c. The assessed risks of material misstatement. For example, higher the risk of material
misstatements, higher the direction, supervision and review.
d. The capabilities and competence of the individual team members performing the audit
work.
6. Is materiality required to be documented by the auditor? What factors have to be considered

this regard?
Answer:
The audit documentation shall include the following amounts and the factors considered in their
determination:
(a) Materiality for the financial statements as a whole
(b) If applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures
(c) Performance materiality and
(d) Any revision of (a)-(c) as the audit progressed

What is the meaning of Sampling? Also discuss the methods of Sampling. Explain in the light of
SA 530 “Audit Sampling”.
Answer:
Meaning of Audit Sampling: “Audit Sampling” means the application of audit procedures to less
than 100% of items within a population of audit relevance such that all sampling units have a
chance of selection in order to provide the auditor with a reasonable basis on which to draw
conclusions about the entire population.
The objective of the auditor when using audit sampling is to provide a reasonable basis for the
auditor to draw conclusions about the population from which the sample is selected.
Some of the important methods of selecting the sample are discussed below –
A. RANDOM SAMPLING: Random selection ensures that all items in the population have a
known chance of selection. It may involve use of random number tables. Random sampling
includes two very popular methods which are discussed below–
1. Simple Random Sampling:

a. Under this method each unit of the whole population e.g. purchase or sales invoice
has an equal chance of being selected.
b. It is considered that random number tables are simple and easy to use and also provide
assurance that the auditors’ bias does not affect the selection.
c. Each item in a population is selected by use of random number table either with a help
of computer or picking up a number in a random way (may be randomly from a drum).
d. Today random numbers are also generated using various applications on the
cellphones like the random number generator.
e. This method is considered appropriate provided the population to be sampled consists
of reasonably similar units and fall within a reasonable range i.e. it is suitable for a
homogeneous population having a similar range.
Example: The population can be considered homogeneous, if say, trade receivables
balances fall within the range of Rs. 55,000 to Rs. 2,25,000 and not in the range
between Rs. 525 to Rs. 10,50,000
2. Stratified Sampling:
a. This method involves dividing the whole population to be tested in a few separate
groups called strata and taking a sample from each of them.
b. Each stratum is treated as if it was a separate population and if proportionate of items
are selected from each of these stratum.
c. The number of groups into which the whole population has to be divided is
determined on the basis of auditor judgment.

B. INTERVAL SAMPLING OR SYSTEMATIC SAMPLING: Systematic selection is a selection method
in which the number of sampling units in the population is divided by the sample size to give
a sampling interval.
C. MONETARY UNIT SAMPLING: It is a type of value-weighted selection in which sample size,

selection and evaluation results in a conclusion in monetary amounts.
D. HAPHAZARD SAMPLING:
1. Haphazard selection, in which the auditor selects the sample without following a
structured technique.
2. Although no structured technique is used, the auditor would nonetheless avoid any
conscious bias or predictability.
3. This ensure that all items in the population have a chance of selection.
4. This method is not superior to other methods, as we the auditor does not follow any
structured technique.
E. BLOCK SAMPLING:
1. This method involves selection of a block(s) of contiguous items from within the
population.
2. Block selection cannot ordinarily be used in audit sampling because most populations are
structured such that items in a sequence can be expected to have similar characteristics
to each other.
3. Usually, a range of continuous transaction shall have similar characteristics, therefore,
selection of a group at one time will not give a reasonable basis for opinion on the overall
population as different types of transactions and unusual transactions may not be covered
in the group taken all at once.
2. With reference to Standard on Auditing 530, state the requirements relating to audit sampling,
sample design, sample size and selection of items for testing.
Answer:
Audit Sampling: As per SA 530 on “Audit Sampling”, the meaning of the term Audit Sampling is –
the application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provid e the auditor
with a reasonable basis on which to draw conclusions about the entire population. The
requirements relating to sample design, sample size and selection of items for testing are
explained below-
Sample design - When designing an audit sample, the auditor shall consider the purpose of the
audit procedure and the characteristics of the population from which the sample will be drawn.
Sample Size- The auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.

Selection of Items for Testing- The auditor shall select items for the sample in such a way that
each sampling unit in the population has a chance of selection.
3. While planning the audit of S Ltd. you want to apply sampling techniques. What are the risk
factors you should keep in mind?
Answer:
Risk Factors while applying Sampling Techniques: As per SA 530 “Audit Sampling”, sampling risk
is the risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure. Sampling risk can lead to
two types of erroneous conclusions-
a. In the case of a test of controls, that controls are more effective than they actually are, or in
the case of tests of details, that a material misstatement does not exists when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects
audit effectiveness and is more likely to lead to an inappropriate audit opinion.
b. In the case of test of controls, the controls are less effective than they actually are, or in the
case of tests of details, that a material misstatement exists when in fact it does not. This type
of erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
4. Write short notes on the following:

(a) Advantages of Statistical sampling in Auditing.
(b) Stratified sampling
The advantages of statistical sampling may be summarized as follows –

(1) The amount of testing (sample size) does not increase in proportion to the increase in the size
of the area (universe) tested.
(2) The sample selection is more objective and thereby more defensible.
(3) The method provides a means of estimating the minimum sample size associated with a
specified risk and precision.
(4) It provides a means for deriving a “calculated risk” and corresponding precision (sampling
error) i.e. the probable difference in result due to the use of a sample in lieu of examining all
the records in the group (universe), using the same audit procedures.
(5) It may provide a better description of a large mass of data than a complete examination of all
the data, since non-sampling errors such as processing and clerical mistakes are not as large.
(6) It is widely accepted way of sampling as it is more scientific, without personal bias and the
result of sample can be evaluated and projected in more reliable way.
Stratified Sampling:

a. This method involves dividing the whole population to be tested in a few separate groups
called strata and taking a sample from each of them.
b. Each stratum is treated as if it was a separate population and if proportionate of items are
selected from each of these stratum.
c. The number of groups into which the whole population has to be divided is determined on
the basis of auditor judgment.
5. What precautions should be taken by the auditor while applying test check techniques?
Answer:
Precautions to be taken while applying test check techniques are

• Thorough study of accounting system should be done before adopting sampling.
• Proper study of internal control systems.
• Areas which are not suitable for sampling should be carefully considered. Eg: compliance with
statutory provisions, transactions of unusual nature etc.
• Proper planning for Sampling methods to be used and explaining the staff,
• Transactions and balances have to be properly classified (stratified)
• Sample size should be appropriately determined.
• Sample should be chosen in unbiased way,
• Errors located in the sample should be analysed properly.
6. Explain the factors to be considered while determining the extent of checking on a sampling
plan.
The factors that should be considered for deciding upon the extent of checking on a sampling plan
are following:
a. Size of the organisation under audit.
b. State of the internal control.
c. Adequacy and reliability of books and records.
d. Tolerable error range.
e. Degree of the desired confidence.

1. Explain how a statutory auditor of a company can apply analytical procedures at the planning
phase of audit.
Answer:
Analytical Procedures are required in the planning phase and it is often done during the testing
phase. In addition these are also required during the completion phase.
Analytical Procedures in Planning the Audit
In the planning stage, analytical procedures assist the auditor in understanding the client’s
business and in identifying areas of potential risk by indicating aspects of and developments in
the entity’s business of which he was previously unaware. This information will assist the auditor
in determining the nature, timing and extent of his other audit procedures. Analytical procedures
in planning the audit use both financial data and non financial information, such as number of
employees, square feet of selling space, volume of goods produced and similar information.
For example, analytical procedures may help the auditor during the planning stage to determine
the nature, timing and extent of audit procedures that will be used to obtain audit evidence for
specific account balances or classes of transactions.
2. While applying the Substantive Analytical Procedures what techniques can be used by the
statutory auditor of a company to obtain sufficient and appropriate audit evidence?
Answer:
Trend analysis – Trend analysis is a commonly used technique. It is the comparison of current data
with the prior period balance or with a trend in two or more prior period balances. We evaluate
whether the current balance of an account moves in line with the trend established with previous
balances for that account, or based on an understanding of factors that may cause the account to
change.
Ratio analysis – Ratio analysis is useful for analysing asset and liability accounts as well as revenue
and expense accounts. An individual balance sheet account is difficult to predict on its own, but
its relationship to another account is often more predictable (e.g., the trade receivables balance
related to sales). Ratios can also be compared over time or to the ratios of separate entities within
the group, or with the ratios of other companies in the same industry.
Reasonableness tests – Unlike trend analysis, this analytical procedure does not rely on events of
prior periods, but upon non-financial data for the audit period under consideration (e.g.,
occupancy rates to estimate rental income or interest rates to estimate interest income or
expense). These tests are generally more applicable to income statement accounts and certain

accrual or prepayment accounts. In other words these tests are made by reviewing the
relationship of certain account balances to other balances for reasonableness of amounts.
Structural modelling – A modelling tool constructs a statistical model from f inancial and/or non-
financial data of prior accounting periods to predict current account balances (e.g., linear
regression). The statutory auditor may use any of the above mentioned techniques while applying
substantive analytical procedures depending upon the availability of data and requirements of
the case.
3. The statutory auditor of MNO Ltd., CA Kishore identifies certain inconsistencies while applying
analytical procedures to the financial and non financial data of MNO Ltd. What should CA
Kishore do in this case with reference to SA 520 on “Analytical Procedures”?
Answer:
As per SA 520- “Analytical Procedures” If while applying analytical procedures in accordance with
SA 520, the statutory auditor identifies f luctuations or relationships that are inconsistent with
other relevant information or that differ from expected values by a significant amount, the auditor
shall investigate such differences by:
(i) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses: Audit evidence relevant to management’s responses may be obtained
by evaluating those responses taking into account the auditor’s understanding of the entity and
its environment, and with other audit evidence obtained during the course of the audit.
(ii) Performing other audit procedures as necessary in the circumstances: The need to perform
other audit procedures may arise when, for example, management is unable to provide an
explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.
In the present case, CA Kishore identifies certain inconsistencies while applying analytical
procedures to the financial and non financial data of MNO Ltd. CA Kishore should inquire the
management of MNO Ltd. and obtain sufficient and appropriate audit evidence relevant to
management response. Further, CA Kishore should also perform other audit procedures if
required in the circumstances of the case to obtain further sufficient and appropriate audit
evidence.
4. What are the factors that determine the extent of reliance that the auditor places on results of
analytical procedures? Explain with reference to SA-520 on “Analytical procedures”.
Answer:
The reliability of data is influenced by its source and nature and is dependent on the circumstances
under which it is obtained. Accordingly, the following are relevant when determining whether
data is reliable for purposes of designing substantive analytical procedures:

(i) Controls over the preparation of the information Source of the information available. For
example, information may be more reliable when it is obtained from independent sources outside
the entity;
(ii) Comparability of the information available. For example, broad industry data may need to be
supplemented to be comparable to that of an entity that produces and sells specialised products;
(iii) Nature and relevance of the information available. For example, whether budgets have been
established as results to be expected rather than as goals to be achieved; and
(iv) Controls over the preparation of the information that are designed to ensure its completeness,
accuracy and validity. For example, controls over the preparation, review and maintenance of
budgets.

1. How will you vouch and/or verify the following:
(a) Goods sent out on Sale or Return Basis.
(b) Borrowing from Banks.
Answer:
Goods Sent Out on Sale or Return Basis:
a. Check whether a separate memoranda record of goods sent out on sale or return basis is
maintained. The party accounts are debited only after the goods have been sold and the sales
account is credited.
b. Verify that price of such goods is unloaded from the sales account and the trade receivables
record. Check the memoranda record to confirm that on the receipt of acceptance from each
party, his account has been debited and the sales account correspondingly credited.
c. Ensure that the goods in respect of which the period of approval has expired at the end of the
year, have either been received back or customers’ accounts have been debited.
d. Confirm that the inventory of goods sent out on approval, the period of approval in respect of
which had not expired till the end of the year lying with the party, has been included in the
closing inventory.
Borrowing from Banks: Borrowing from banks may be either in the form of overdraft limits or
term loans. In each case, the borrowings should be verified as follows-
a. Reconcile the balances in the overdrafts or loan accounts with that shown in the pass book(s)
and confirm the last mentioned balance by obtaining a certificate from the bank showing the
balance in the accounts as at the end of the year.
b. Obtain independent balance confirmation from the bank showing balances, particulars of
securities deposited with the bank as security for the loans or of the charge created on an
asset and confirm that the same has been correctly disclosed and duly registered with
Registrar of Companies and recorded in the Register of charges.
c. Verify the authority under which the loan or draft has been raised. In the case of a company,
only the Board of Directors is authorised to raise a loan or borrow from a bank.
d. Confirm, in the case of a company, that the restraint contained in Section 180 of the
Companies Act, 2013 as regards the maximum amount of loan that the company can raise has
not been contravened.
Ascertain the purpose for which loan has been raised and the manner in which it has been utilised
and that this has not prejudicially affected the entity.
2. How will you vouch/verify the following:

(a) Goods sent on consignment.
(b) Foreign travel expenses.

(c) Receipt of capital subsidy.
(d) Provision for income tax.
Answer:
Goods Sent on Consignment:
a. Verify the accounts sales submitted by the consignee showing goods sold and inventory of
goods in hand.
b. Reconcile the figure of the goods on hand, as given in the last accounts sales, with the
Performa invoices and accounts sales received during the year. If any consignment inventory
was in the hands of the consignee at the beginning of the year, the same should be taken into
account in the reconciliation.
c. Obtain confirmation from the consignee for the goods held on consignment on the balance
sheet date. Verify the terms of agreement between the consignor and the consignee to check
the commission and other expenses debited to the consignment account and credited to the
consignee’s account. The accounts sales also must be correspondingly checked.
d. Ensure that the quantity of goods in hand with the consignee has been valued at cost plus
proportionate non-recurring expenses, e.g., freight, dock dues, customs due, etc., unless the
value is lower. In case net realisable value is lower, the inventory in hand of the consignee
should be valued at net realisable value. Also see that the allowance has been made for
damaged and obsolete goods in making the valuation.
e. See that goods in hand with the consignee have been shown separately under the head
inventories.
Foreign Travel Expenses:
a. Examine Travelling Allowance bills submitted by the employees stating the details of tour,
details of expenses, etc.
b. Verify that the tour programme was properly authorised by the competent authority.
c. Check the T.A. bills along with accompanying supporting documents such as air tickets, travel
agents bill and hotel bills with reference to the internal rules for entitlement of the employees
and also make sure that the bills are properly passed.
d. See that the tour report accompanies the T.A. bill. The tour report will show the purpose of
the tour. Satisfy that the purpose of the tour as shown by the tour report conforms to the
authorisation for the tour.
e. Check Reserve Bank of India’s permission, if necessary, for withdrawing the foreign exchange.
For a company the amount of foreign exchange spent is to be disclosed separately in the
accounts as per requirement of Schedule III to the Companies Act, 2013 and Accounting
Standard 11 “The Effects of Changes in Foreign Exchange Rates”.
Receipt of Capital Subsidy:
a. Check the application made for the claim of subsidy to ascertain the purpose and the scheme
under which the subsidy has been made available.
b. Examine documents for the grant of subsidy and note the conditions attached with the same
relating to its use, etc.

c. Ensure that the conditions to be fulfilled and other terms especially whether the same is for a
specific asset or is for setting up a factory at a specific location.
d. Check relevant entries for receipt of subsidy.
e. Check compliance with requirements of AS 12 on “Accounting for Government Grants” i.e.
whether it relates to specific amount or in the form of promoters’ contribution and
accordingly accounted for as also compliance with the disclosure requirements.
Provision for Income Tax:
a. Obtain the computation of income and income tax prepared by the entity and verify whether
it is as per the Income-tax Act, 1961 and Rules made thereunder.
b. Review adjustments, expenses, disallowed special rebates, etc. with particular reference to
the last available completed assessment.
c. Examine relevant records and documents pertaining to advance tax, self-assessment tax and
other demands.
d. Compute tax payable as per the latest applicable rates in the Finance Act. Ensure that overall
provisions on the date of the balance sheet is adequate having regard to current year
provision, advance tax paid, assessment orders, etc.
e. Ensure that the requirements of AS 22 on Accounting for Taxes on Income have been
appropriately followed for the period under audit.
3. How will you vouch and/or verify payment of taxes?

Answer:
Vouching of Payment of Taxes:
a. Payment on account of income-tax and other taxes consequent upon a regular assessment
should be verified by reference to the copy of the assessment order, assessment form, notice
of demand and the receipted challan.
b. Payments or advance payments of income-tax should also be verified with the notice of
demand and the receipted challan acknowledging the amount paid.
c. The interest allowed on advance payments of income-tax should be included as income and
penal interest charged for non-payment should be debited to the interest account. Nowadays,
electronic payment of taxes is also in trend.
d. Electronic payment of taxes means payment of taxes by way of internet banking facility or
credit or debit cards.
e. The entity can make electronic payment of taxes also from the account of any other person.
However, the challan for making such payment must clearly indicate the Permanent Account
Number (PAN) of the assessee on whose behalf the payment is made. This should be checked
by the auditor.
f. It is not necessary for the entity to make payment of taxes from his own account in an
authorized bank.
g. While vouching such e-payment, the auditor should cross verify the payments of taxes
through the receipted challan along with PAN No /TAN No. etc.

4. How would you vouch/verify the following:
(a) Advertisement Expenses.
(b) Sale of Scrap.
Answer:
Advertisement Expenses:
a. Verify the bills/invoices from advertising agency to ensure that rates charged for different
types of advertisement are as per the contract.
b. See that the advertisement relates to client’s business. Inspect the receipt issued by the
agency.
c. Ascertain the nature of expenditure – revenue or capital expenditure and see that it has been
recorded properly.
d. Ascertain the period for which payment is made and see that prepaid amount, if any, is carried
to the balance sheet.
e. See that all outstanding advertisement bills have been provided for.
Sale of Scrap:
a. Review the internal control as regards generation, storage and disposal of scrap.
b. Check whether the organization is maintaining reasonable record for generation of scrap.
c. Analyze the raw material used, production and generation pattern of scrap and compare the
same with figures of earlier year.
d. Check the rates at which scrap has been sold and compare the rate with previous year. Vouch
sales, with invoices raised, advertisement for tender, rate contract with scrap dealers.
e. Ensure that there exists a proper control procedure to identify scrap and good units and they
are not mixed up and sold as scrap.
f. Make an overall assessment of the value of realization from scrap as to its reasonableness.
5. ABC Ltd. has issued shares for cash at a premium. Section 52 of the Companies Act, 2013
provides that a Company shall transfer the amount received by it as securities premium to
securities premium account. Advise the means in which the amount in the account can be
applied.
Answer:
Shares Issued at Premium: In case a company has issued shares at a premium, that is, at amount
in excess of the nominal value of the shares, whether for cash or otherwise, section 52 of the
Companies Act, 2013 provides that a Company shall transfer the amount received by it as
securities premium to securities premium account and state the means in which the amount in
the account can be applied. As per the section, where a company issues shares at a premium,
whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on
those shares shall be transferred to a “securities premium account” and the provisions of this Act

relating to reduction of share capital of a company shall apply as if the securities premium account
were the paid-up share capital of the company.
Application of securities premium account: The securities premium account may be applied by
the Company:
a. towards the issue of unissued shares of the company to the members of the company as fully
paid bonus shares;
b. in writing off the preliminary expenses of the Company;
c. in writing off the expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company;
d. in providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company; or
e. for the purchase of its own shares or other securities under section 68.
The auditor needs to verify whether the premium received on shares, if any, has been transferred
to a “securities premium account” and whether the application of any amount out of the said
“securities premium account” is only for the purposes mentioned above
6. The auditor A of ABC & Co.- firm of auditors is conducting the audit of XYZ Ltd and while
performing testing of additions wanted to verify that all PPE (Property Plant and Equipment)
purchase invoices are in the name of the entity he is auditing. For all additions to land, building
in particular, the auditor desires to have concrete evidence about ownership. The auditor is
worried about whether the entity has valid legal ownership rights over the PPE claimed to be
held by the entity and recorded in the financial statements. Advise the auditor.
Answer:
In addition to the procedures undertaken for verifying completeness of additions to PPE during
the period under audit, the auditor while performing testing of additions should also verify that
all PPE purchase invoices are in the name of the entity that entitles legal title of ownership to the
respective entity. For all additions to land, building in particular, the auditor should obtain copies
of conveyance deed/ sale deed to establish whether the entity is mentioned to be the legal and
valid owner.
The auditor should insist and verify the original title deeds for all immoveable properties held as
at the balance sheet date. In case the entity has given such immoveable property as security for
any borrowings and the original title deeds are not available with the entity, the auditor should
request the entity’s management for obtaining a confirmation from the respective lenders that
they are holding the original title deeds of immoveable property as security. In addition, the
auditor should also verify the register of charges, available with the entity to assess that any
charge has been created against the PPE.
7. Write the audit Procedure for verification of existence of Trade Receivables.

Answer:

For Verification of Existence of Trade Receivables, the auditor should check the following :
a. Check whether there are controls in place to ensure that invoices cannot be recorded more
than once and receivable balances are automatically recorded in the general ledger from the
original invoice. Ask for a period-end accounts receivable ageing report and trace the balance
as per the report to the general ledger.
b. Check whether realization is recorded invoice-wise or not. If not, check that money received
from debtors is adjusted chronologically invoice wise and on FIFO basis i.e. previous bill is
adjusted first.
c. If any large balance is due for a long time, auditor should ask for reasons and justification for
the same.
d. A list of trade receivables selected for confirmation should be given to the entity for preparing
request letters for confirmation which should be properly addressed.
e. The auditor should maintain strict control to ensure the correctness and proper despatch of
request letters.
f. It should be ensured that confirmations as well as any undelivered letters are returned to the
auditor and not to the client.
g. Any discrepancies revealed by the confirmations received or by the additional tests carried
out by the auditor may have a bearing on other accounts not included in the original sample.
h. Where no reply is received, the auditor should perform alternate procedures regarding the
balances.
i. Agreeing the balance to cash received subsequently; Preparing a detailed analysis of the
balance, ensuring it consists of identifiable transactions and confirming that these revenue
transactions actually occurred. (examination in depth for those balances)
j. If there are any related party receivables, review them for collectability as well as whether
they were properly authorized and the value of such transactions were reasonable and at
arm’s length.
k. Check that receivables for other than sales or services are not included in the list. Review a
trend line of sales and accounts receivable, or a comparison of the two over time, to check if
there are any unusual trends i.e. perform Analytical procedures.
l. Make inquiries about reasons for changes in trends with the management and document the
same in audit work papers.
8. MNO & Associates are the statutory auditor of Venus Ltd. for the FY 2021-22. During the course
of audit, one of the audit team members, Mr. Viaan noticed that the company has made loans
totaling to ` 50 lakhs to the promoters of the company, namely, Mr. Raj and Mr. Rajeev without
specifying the period of repayment. Mr. Viaan discussed with Mr. Manik, the engagement
partner, about the disclosure requirements with respect to such loans required by Schedule III
to the Companies Act, 2013. What should Mr. Manik advise Mr. Viaan?
Answer:
Disclosure requirements of loans granted to promoters as per sch iii:

The following disclosures as required by Schedule III to the Companies Act, 2013, has been made
in respect of the loans granted to promoters, either severally or jointly with any other person, that
are:
a. repayable on demand or
b. without specifying any terms or period of repayment
Type of Amount of loan or advance in the Percentage to the total Loans and
Borrower nature of loan outstanding Advances in the nature of loans
Promoters
Directors
KMPs
Related Parties
9. What are the disclosures requirements as per Part I of Schedule III to the Companies Act with
respect to the cash & cash equivalents held by a company?
Answer:
DISCLOSURE REQUIREMENT REGARDING CASH AND CASH EQUIVALENTS AS PER SCH III:
The following are the disclosure requirements as per Schedule III to the Companies Act, 2013,
with respect to the cash & cash equivalents held by the company:
Cash and cash equivalents
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature)
(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately
stated.
(iii) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately
stated.
(v) Bank deposits with more than 12 months’ maturity shall be disclosed separately.
10. Mercury Ltd. is a company engaged in the manufacture of floor mats. The company sells its
goods on credit. The debtors balance as on 31.03.2022 amounted to ` 20 cr. What is the
disclosure requirement as per Schedule III to the Companies Act 2013, with respect to the
ageing schedule of debtors of the company?
Answer:

Disclosure requirement as per schedule iii to the companies act 2013, with respect to the ageing
schedule of debtors: the following are the disclosure requirement as per Schedule III to the
Companies Act 2013, with respect to the ageing schedule of debtors of the company:
Amount in ₹
Particulars Outstanding for following periods from due date
of payment
Less than 6 months 1-2 2-3 More Total
6 months - 1 year years years than 3
years
(i) Undisputed Trade
receivables – considered
good
(ii) Undisputed Trade
Receivables – considered
doubtful
(iii) Disputed Trade
Receivables considered
good
(iv) Disputed Trade
Receivables considered
doubtful
11. You are the statutory auditor of Jupiter Ltd. for the FY 2022-23. During the course of audit, you
noticed that the company has PPE under construction i.e. Capital Work in Progress. What
disclosures should the company give with respect to the ageing schedule of such capital work
in progress as required by Schedule III to the Companies Act, 2013?
Answer:
a. For Capital-work-in progress, following ageing schedule shall be given:
(Amount in ₹)
Amount in CWIP for a period of Total
CWIP Less 1-2 2-3 More than
than years years 3 years
1 year
Projects in Progress
Projects temporarily
suspended
b. For capital-work-in progress, whose completion is overdue or has exceeded its cost
compared to its original plan, following CWIP completion schedule shall be given:
(Amount in ₹)
To be completed in
CWIP Less than 1 1 -2 years 2-3 years More than 3
year years

Project 1
Project 2
12. The auditor of Saturn Ltd. wants to verify whether the company has valid legal ownership rights
over the inventories recorded in the balance sheet as on 31.03.2023. What audit procedures
should the statutory auditor of the company perform?
Answer:
The statutory auditor of Saturn Ltd. should perform the following audit procedures to verify if the
company has valid legal ownership rights over the inventories recorded in the balance sheet as
on 31.03.2023. The auditor should:
a. vouch recorded purchases to underlying documentation (purchase requisition, purchase
order, receiving report, vendor invoice and cancelled cheque or payment file).
b. evaluate the consigned goods.
c. examine client correspondence, sales and receivables records, purchase documents.
d. determine existence of collateral agreements.
e. review consignment agreements.
f. review material purchase commitment agreements.
g. examine invoices for evidence of ownership i.e. the invoices shall be in the name of the client.
h. obtain confirmation for significant items of inventory.
For instances of inventory held by third party, the auditor should insist on obtaining declaration
from the third party on its business letterhead and signed by an authorized personnel of that third
party confirming that the items of inventory belong to the entity and are being held by such third
party on behalf of and for the benefit of the entity under audit.

Discuss outline of audit approach including audit procedures while auditing “provisions and
contingencies” in financial statements of a bank.
Answers:
1. Provisions made in respect of the NPA: The auditor should ascertain compliance with the
various regulatory requirements: a. For the classification of loans and receivables into
standard, sub-standard, doubtful, loss and non-performing assets and b. For provisioning of
those assets.
2. Provision for Tax: The auditor should obtain the tax provision computation from the bank’s
management. The auditor should re-compute the provision for tax by applying the applicable
tax rate after considering the allowances and disallowances as per Income Tax Act, 1961.
3. Other Provisions: The other provisions for expenditure should be examined in relation to the
circumstances warranting the provisioning and the adequacy of the same by discussing and
obtaining the explanations from the bank's management.
Discuss importance of implementation of KYC norms by a bank from perspective of an auditor

of bank.
The RBI has framed specific guidelines that deal with prevention of money laundering and “Know
Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your
Customer Guidelines – Anti Money Laundering Standards”), requiring banks to establish policies,
procedures and controls to deter and to recognise and report money laundering activities.
List out any four points which highlight peculiarities involved in banking operations.
Banking operations are conducted only at the branches, while other offices act as controlling
authorities or administrative offices that lay down policies, systems and internal control
procedures for conduct of business, in compliance with the statutory/ regulatory impositions
and in compliance of accepted accounting principles and practices that cover all transactions
and economic events.
These controlling/ administrative offices also stipulate the delegation of powers and fix
responsibilities and accountability and these are involved generally in effective supervision,
monitoring and control over the business activities and operations, including seeking faithful

compliance of the bank’s laid down policies/ procedures/controls and deal with deviations
therefrom.
Is statutory auditor of a bank required to report on the requirements relating to Companies

(Auditor’s Report) Order, 2020?
Answer:
CARO 2020 reporting requirements will not be applicable for a banking company.
Account of a borrower availing cash credit facility from branch of a bank has become “Out or
order.” Discuss the term “Out of order”.
Out of Order: An account should be treated as ‘out of order’ if:-

the outstanding balance remains continuously in excess of the sanctioned limit/drawing
power or
In cases where the outstanding balance in the principal operating account is less than the
sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the
date of Balance Sheet ; or 
credits are there but are not enough to cover the interest debited during the same period,
these accounts should be treated as ‘out of order’.
The functioning of banking industry in India is regulated by the Reserve Bank of India (RBI)
which acts as the Central Bank of our country. Explain.
Answer:
The functioning of banking industry in India is regulated by the Reserve Bank of India (RBI) which
acts as the Central Bank of our country. RBI is responsible for development and supervision of the
constituents of the Indian financial system.
1. ISSUE BANKING LICENSE: As per Sec 22 of Banking Regulation Act, every bank should obtain
a Banking license from RBI to conduct banking business in India. No bank can commence the
business of banking or open new branches without obtaining licence from RBI. Banking
operations are only conducted at the branches, while other offices act as controlling
authorities or administrative offices.
2. BANKER’S BANK: RBI is the bank of all banks in India as it provides the loan to banks/bankers,
accept the deposit of banks, and rediscount the bills of banks.
3. DETERMINE CRR AND SLR: Each commercial bank is required to maintain certain portion of
their Net Demand and Time Deposits in the form of cash with the Reserve Bank, called Cash
Reserve Ratio (CRR) and in the form of investment in approved securities, called Statutory
Liquidity Ratio (SLR).

4. POWER TO INSPECT ANY BANK: As per Section 35 of Banking Regulation Act, 1949, RBI has
the power to inspect any bank.
5. MONEY SUPPLY AND CONTROLLER OF CREDIT: To control demand and supply of money in
Economy, it is also responsible for formulating and implementing the monetary policies such
as Open Market Operations, varying the Repo rates, reserve ratios etc.
6. PRUDENTIAL NORMS: RBI issues “Prudential Norms” to be followed by the commercial banks
to strengthen the balance sheets of banks. Few of them are related to income recognition,
asset classification and provisioning etc.
7. ENSURE GOOD CORPORATE GOVERNANCE: RBI ensures good corporate governance in banks.
RBI issued guidelines for fit and proper criteria to become directors of banks. RBI may appoint
additional directors in the board of bank, in case of irregularities.
“The engagement team should hold discussions to gain better understanding of the bank and
its environment, including internal control, and also to assess the potential for material
misstatements of the financial statements. All these discussions should be appropriately
documented for future reference”. Explain.
Answer:
ENGAGEMENT TEAM DISCUSSIONS: The engagement team should hold discussions to gain better
understanding of the bank and its environment, including internal control. They should assess the
potential for material misstatements of the financial statements. These discussions are ordinarily
done at the planning stage of an audit. All these discussions should be appropriately documented
for future reference.
MATTERS TO BE DISCUSSED IN GENERAL: The engagement team discussion ordinarily includes a

discussion of the following matters:
a. Errors that may be more likely to occur.
b. Errors which have been identified in prior years.
c. Method by which fraud might be perpetrated by bank personnel or others within particular
account balances and/or disclosures.
d. Need to maintain professional skepticism throughout the audit engagement.
e. Audit responses to Engagement Risks
f. Need to alert for information or other conditions that indicates that a material misstatement
may have occurred (e.g., the bank’s application of accounting policies in the given facts and
circumstances)
ADVANTAGES OF DISCUSSIONS:

a. Provides an opportunity for more experienced engagement team members, including the audit
engagement partner, to share their insights based on their knowledge of the bank and its
environment including its business risks.
b. Provides an understanding amongst the engagement team members about effect of the results
of the risk assessment procedures including decisions about the nature, timing, and extent of
further audit procedures.
c. Specific emphasis (attention) should be provided to the susceptibility of the bank’s financial
statements to material misstatement due to fraud, that enables the engagement team to consider
an appropriate response to fraud risks.
Write a short note on reversal of income under bank audit.
1. If any advance, including bills purchased and discounted, becomes NPA as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should be
reversed or provided for if the same is not realised. This will apply to Government guaranteed
accounts also.
2. In respect of NPA’s, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed or provided for with respect to past periods,
if uncollected.
3. Further, in case of banks which have wrongly recognised income in the past should:
a. Reverse the interest if it was recognised as income during the current year or
b. Make a provision for an equivalent amount if it was recognized as income in the previous
year(s).

1. Explain in detail the duties of Comptroller and Auditor General of India.
Answer:
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 defines
functions and powers in detail. The relevant provisions are discussed hereunder:
1. Compile and submit Accounts of Union and States:
a. The Comptroller and Auditor General shall be responsible for compiling the accounts of the
Union and of each State.
b. The compiled accounts shall be submitted to:
i. Union Government accounts to the President
ii. State Government accounts to the Governor of a State
iv. Union territory accounts to Administrator of the Union Territory.
The CAG is responsible providing all the assistance in the preparation of the annual financial
statements as they may reasonably ask for.
2. General Provisions Relating to Audit: It shall be the duty of the Comptroller and Auditor
General—
a. To audit and report on all expenditure from the Consolidated Fund of India and of each
State and of each Union Territory having a Legislative Assembly and whether the expenditure
conforms to the authority which governs it;
b. To audit and report all transactions of the Union and of the States relating to Contingency
Funds and Public Accounts;
c. To audit and report on all trading, manufacturing and profit and loss accounts and balance-
sheets and other subsidiary accounts kept in any department of the Union or of a State.
3. Audit of Receipts and Expenditure: Where anybody or authority is substantially financed by
grants or loans from the Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly, the Comptroller and Auditor General shall, subject to the
provisions of any law for the time being in force applicable to the body or authority, as the
case may be, audit all receipts and expenditure of that body or authority and to report on the
receipts and expenditure audited by him.
Meaning of Substantially financed: Where the grant or loan to a body or authority from the
Consolidated Fund of India or of any State or of any Union Territory having a Legislative
Assembly in a financial year is not less than ₹ 25 lakhs and the amount of such grant or loan
is not less than 75% of the total expenditure of that body or authority, such body or authority
shall be deemed, for this purpose to be substantially financed by such grants or loans as the
case may be.
4. Audit of Grants or Loans: Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory having a Legislative
Assembly to any authority or body, not being a foreign State or international organisation, the
Comptroller and Auditor General shall scrutinise the procedures by which the sanctioning

authority satisfies itself as to the fulfillment of the conditions subject to which such grants or
loans were given.
5. Audit of Receipts of Union or States: It shall be the duty of the Comptroller and Auditor
General to audit all receipts which are payable into the Consolidated Fund of India and of each
State and of each Union Territory having a Legislative Assembly.
6. Audit of Accounts of Stores and Inventory: The Comptroller and Auditor General shall have
authority to audit and report on the accounts of stores and inventory kept in any office or
department of the Union or of a State.
7. Audit of Government Companies and Corporations: The duties and powers of the
Comptroller and Auditor General in relation to the audit of the accounts of government
companies shall be performed and exercised by him in accordance with the provisions of the
Companies Act, 2013.
2. Define Government Audit & explain its objectives.

Answer:
Government Audit is the
• objective, systematic, professional and independent examination of financial, administrative
and other operations of a public entity ,
• made subsequently to their execution
• for the purpose of evaluating and verifying them,
• presenting a report containing explanatory comments on audit findings together with
conclusions and recommendations for future action by the responsible officials and in the case
of examination of financial statements,
• expressing the appropriate professional opinion regarding the fairness of the presentation.
The objectives of government auditing are as follows:
1. Accounting for Public Funds: It serves as a mechanism or process for public accounting of
government funds.
2. Appraisal of Govt. Policies: It also provides public accounting of the operational, management,
programme and policy aspects of public administration as well as accountability of the officials
administering them.
3. Corrective Actions: Audit observations based on factual data collection also serve to highlight
the lapses of the lower hierarchy, thus helping supervisory level officers to take corrective
measures.
4. Administrative Accountability: The main objective of audit is a combination of ensuring

accountability of administration to legislature and functioning as an aid to administration
3. In case of Government entities, audit of accounts of stores and inventories has been developed
as a part of expenditure audit. Discuss about the duties and responsibilities entrusted to C&AG.
Answer:
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit
with reference to the duties and responsibilities entrusted to C&AG.
Audit is conducted :-
1. To ascertain whether the regulations governing purchase, receipt and issue, custody, sale and
inventory taking of stores are well devised and properly carried out.
2. To bring to the notice of the government any deficiencies in quantities of stores held or any
defects in the system of control.
3. To verify that the purchases are properly sanctioned, made economical and in accordance with
the Rules for purchase laid down by the competent authority.
4. To ensure that the prices paid are reasonable and are in agreement with those shown in the
contract for the supply of stores, and that the certificates of quality and quantity are furnished by
the inspecting and receiving units.
5. Cases of uneconomical purchase of stores and losses attributable to defective or inferior quality
of stores are specifically brought by the audit.
6. To check the accounts of receipts, issues and balances regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms for
level of consumption of inventory holding.
7. Any excess or idle inventory is specifically mentioned in the report and periodical verification
of inventory is also conducted to ensure their existence.
8. The valuation of the inventories is seen carefully so that the value accounts tally with the
physical accounts and that adjustment of profits or losses due to revaluation, inventory taking or
other causes is carried out.

1. Sporting Club of India is a private club engaged in promotion of sports in the country. As an
auditor of this leading club, discuss any two points to ensure that expenditure incurred by club
during the year is properly authorised.
Answer:
a. PURCHASES: Vouch purchase of sports items, furniture, crockery, etc. and trace their entries
into the respective inventory registers.
b. MARGINS EARNED: Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price
so as to confirm that the normal rates of gross profit have been earned on their sales. The
inventory of unsold provisions and stores, at the end of year, should be verified physically and
its valuation checked.
c. INVENTORIES: Check the inventory of furniture, sports material and other assets physically
with the respective inventory registers or inventories prepared at the end of the year.
2. Tomo Construction Engineering LLP approached CA K to understand various returns to be filed

by them as part of statutory compliance. Discuss, how, CA K should advise them.
Answer:
RETURNS TO BE MAINTAINED AND FILED BY AN LLP:
1. Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer
of financial year. The annual return will be available for public inspection on payment of
prescribed fees to Registrar.
2. Every LLP is also required to submit Statement of Account and Solvency in Form 8 which shall
be filed within a period of thirty days from the end of six months the financial year to which the
Statement of Account and Solvency relates.
3. CA Irfan Zaidi is auditor of a prestigious five-star hotel in Jaipur. He notices that there is a gift
shop doing brisk business inside the hotel premises. On further enquiries, he comes to know
that stocks in gift shop belong to gift shop owner and hotel receives rent for letting out this
space. Discuss, how, auditor can verify payment of common amenities used by gift shop owner
to the hotel./ As an auditor, what would be your areas of consideration while auditing the
element of ROOM SALES during the audit of a 5-Star Hotel.
Answer:
The charge for room sales is normally posted to guest bills by the receptionist/ front office or in
the case of large hotels by the night auditor. The source of these entries is invariably the guest
register and audit tests should be carried out to ensure that the correct numbers of guests are
charged for the correct period. Any difference between the charged rates used on the guests’ bills
and the standard room rate should be investigated to ensure that they have been properly
authorised.

In many hotels, the housekeeper prepares a daily report of the rooms which were occupied the
previous night and the number of beds kept in each room. This report tends not to be
permanently retained and the auditor should ensure that a sufficient number of reports are
available for him to test both with the guest register and with the individual guest’s bill. The
auditor should ensure that proper valuation of occupancy-in-progress at the balance sheet date
is made and included in the accounts. The auditor should ensure that proper records are
maintained for booking of halls and other premises for special parties and recovered on the basis
of the tariff.
4. A muti-speciality hospital has come up in your city. You are appointed as auditor for first year.
Discuss, any four, broad areas to be kept in mind while conducting audit of accounts of such a
newly opened multi-speciality hospital./ The general transactions of a hospital include patient
treatment, collection of receipts, donations, capital expenditures. You are required to mention
special points of consideration while auditing such transactions of a hospital?
Answer:
The special steps involved in the audit of hospital are:
1. REGISTER OF PATIENTS:
a. Vouch the Register of patients with copies of bills issued to them.
b. Verify bills for a selected period with the patients’ attendance record to see that the bills have
been correctly prepared.
c. Also see that bills have been issued to all patients from whom an amount was recoverable
according to the rules of the hospital.
2. COLLECTION OF CASH: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend and
other interest warrants, copies of rent bills, etc.
3. INVESTMENTS INCOME:
a. Vouching the amounts received with the dividend and interest counterfoils.
b. Checking the calculations of interest received on securities bearing fixed rates of interest.
c. Checking that the appropriate dividend has been received where any investment has been sold
ex-dividend or purchased cum-dividend.
d. Comparing the amounts of dividend received with schedule of investments making special
enquiries into any investments held for which no dividend has been received.
4. LEGACIES AND DONATIONS: Ascertain that legacies and donations received for a specific
purpose have been applied in the manner agreed upon.
5. RECONCILIATION OF SUBSCRIPTIONS: Trace all collections of subscription and donations from
the Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
6. AUTHORISATION AND SANCTIONS: Vouch all purchases and expenses and verify that the
capital expenditure was incurred only with the prior sanction of the Trustees or the Managing
Committee and that appointments and increments to staff have been duly authorised.

7. INCOME TAX REFUNDS: Where income-tax has been deducted from the Investment income, it
should be seen that a refund thereof has been obtained since charitable institutions are exempt
from payment of Income-tax.
8. BUDGETS: Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee, significant variations
which have taken place.
9. INTERNAL CHECK: Examine the internal check as regards the receipt and issue of stores;
medicines, linen, apparatus, clothing, instruments, etc. so as to ensure that purchases have been
properly recorded in the Inventory Register and that issues have been made only against proper
authorisation.
10. DEPRECIATION: See that depreciation has been written off against all the assets at the
appropriate rates.
11. INVENTORIES: Obtain inventories, especially of stocks and stores as at the end of the year and
check a percentage of the items physically; also compare their total values with respective ledger
balances.
12. MANAGEMENT REPRESENTATION AND CERTIFICATE: Get proper Management
Representation and Certificate with respect to various aspects covered during the course of audit.
5. You have been appointed as an auditor of an NGO, briefly state the points on which you would
concentrate while planning the audit of such an organisation?/ An NGO operating in Delhi had
collected large scale donations for Tsunami victims. The donations so collected were sent to
different NGOs operating in Tamil Nadu for relief operations. This NGO operating in Delhi has
appointed you to audit its accounts for the year in which it collected and remitted donations for
Tsunami victims. Draft audit programme for audit of receipts of donations and remittance of
the collected amount to different NGOs. Mention six points each, peculiar to the situation,
which you will like to incorporate in your audit programme for audit of said receipts and
remittances of donations.
Answer:
The audit programme should include in a sequential order all assets, liabilities, income and
expenditure ensuring that no material item is omitted.
1. Corpus Fund: The contributions / grants received towards corpus be vouched with special
reference to the letters from the donor(s). The interest income be checked with Investment
Register and Physical Investments in hand.
2. Reserves: Vouch transfers from projects / programmes with donors letters and board
resolutions of NGO.
3. Ear-marked Funds: Check requirements of donors institutions, board resolution of NGO, rules
and regulations of the schemes of the ear-marked funds.
4. Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
5. Fixed Assets: Vouch all acquisitions / sale or disposal of assets including depreciation and the
authorisations for the same. Also check donor’s letters/ agreements for the grant. In the case of
immovable property check title, etc.

6. Investments: Check Investment Register and the investments physically ensuring that
investments are in the name of the NGO. Verify further investments and dis- investments for
approval by the appropriate authority and reference in the bank accounts for the principal amount
and interest.
7. Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the year
and whether it tallies with the books of account.
8. Bank Balance: Check the bank reconciliation statements and ascertain details for old
outstanding and unadjusted amounts.
9. Inventory: Verify inventory in hand and obtain certificate from the management for the
quantities and valuation of the same.
10. Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting
the particular programme or project to ascertain the conditions with respect to undertaking the
programme/project and accordingly, in the case of programmes/projects involving contracts,
ensure that income tax is deducted, deposited and returns filed and verify the terms of the
contract.
11. Establishment Expenses: Verify that provident fund, life insurance premium, employees state
insurance and their administrative charges are deducted, contributed and deposited within the
prescribed time. Also check other office and administrative expenses such as postage, station ery,
travelling, etc.
6. Mention the special points to be examined by the auditor in the audit of a charitable institution
running hostel for students pursuing the Chartered Accountancy Course and which charges only
INR 500 per month from a student for their lodging/boarding.
Answer:
1. Subscriptions and donations:
a. Ascertaining, if any, the changes made in amount of annual or life membership
subscription during the year.
b. Whether official receipts are issued;
i. Confirming that adequate control is imposed over unused receipt books;
ii. Obtaining all receipt books covering the period under review;
iii. Test checking the counterfoils with the cash book; any cancelled receipts being specially
looked into.
iv. obtaining the printed list of subscriptions and donations and agreeing them with the
total collections shown in the accounts;
v. verifying the total subscriptions and donations received with any figures published in
reports, etc. issued by the charity.
2. Legacies: Verifying the amounts received by reference to correspondence with any figures and
other available information.
3. Grants:
a. Vouching the amount received with the relevant correspondence, receipts and minute books.
b. Obtaining a certificate from a responsible official showing the amount of grants received.
4. Rent: Examining the rent roll and inspecting tenancy agreements, noting in each case:

a. the amounts of the rent and the due dates.
b. Vouching the rent on to the rent roll from the counterfoils of receipt books and checking the
totals of the cash book.
5. Special function:
a. Vouching gross receipts and outgoings in respect of any special functions, e.g. concerts,
dramatic performance, etc., held in aid of the charity with such vouchers and cash statements as
are necessary.
b. In particular, verifying that the proceeds of all tickets issued have been accounted for, after
making the allowance for returns.
6. Income Tax Refunds: Where income-tax has been deducted from the Investment income, it
should be seen that a refund thereof has been obtained since charitable institutions are exempt
from payment of Income-tax.
7. You are auditing the Books of accounts of Karla Multiplex which runs 15 Film shows everyday.
One of the major issues which are of concern to you as an auditor is the Agreement entered
into the Multiplex owners with the Film Distributors. State what points would you check as an
auditor in this respect.
Answer:
1. Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of such
expenditure should be capitalized.
2. Confirm that depreciation on machinery and furniture has been charged at an appropriate rate.
3. Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
4. Examine unadjusted balance out of advance paid to the distributors against film hire contracts
to see that they are good and recoverable. If any film in respect of which an advance was paid has
already run, it should be enquired as to why the advance has not been adjusted. The management
should be asked to make a provision in respect of advances that are considered irrecoverable.
8. CA A is appointed as the auditor of a charitable institutions. Discuss the audit procedure

undertaken by him while auditing the Subscription and Donation received by the charitable
institution.
Answer:
Subscriptions and donations:
a. Ascertaining, if any, the changes made in amount of annual or life membership subscription
during the year.
b. Whether official receipts are issued;
i. Confirming that adequate control is imposed over unused receipt books;
ii. Obtaining all receipt books covering the period under review;
iii. Test checking the counterfoils with the cash book; any cancelled receipts being
specially looked into.

iv. obtaining the printed list of subscriptions and donations and agreeing them with the
total collections shown in the accounts;
v. verifying the total subscriptions and donations received with any figures published in
reports, etc. issued by the charity.
9. Local Fund Audit Wing of a State of a State Government has appointed you to audit the accounts
of one of the Local body governed by it. As an auditor, what will be your reporting areas?
Answer:
The external control of municipal expenditure is exercised by the state governments through the
appointment of auditors to examine municipal accounts. However , the municipal corporations of
Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external
audit.
The important objectives of audit are:
1. Reporting on the fairness of the content and presentation of financial statements;
2. Reporting upon the strengths and weaknesses of systems of financial control;
3. Reporting on the adherence to legal and/or administrative requirements;
4. Reporting upon whether value is being fully received on money spent; and
5. Detection and prevention of error, fraud and misuse of resources.
10. You have been appointed as an auditor of VJM Schools. Discuss the points which merit your
consideration as an auditor while verifying Assets and Liabilities of VJM Schools.
Answer:
a. Vouch, all capital expenditure in the usual way and verify the same with the sanction for the
Committee as contained in the minute book.
b. Vouch, in the usual manner, all establishment expenses and enquire into any unduly heavy
expenditure under any head.
c. If there was any annual budget prepared, see that any excess under any head over the
budgeted amount was duly sanctioned by the Managing Committee. If not, bring it to the
Committee’s notice in your report.
d. Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs,
clothing and other equipment is efficient and all bills are duly authorised and passed before
payment.
e. Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These
should be checked by reference to Inventory Register or corresponding inventories of the
previous year and values applied to various items should be test checked.
f. Confirm that caution money and other deposits paid by students on admission, have been
shown as liability in the balance sheet not transferred to revenue, unless they are not
refundable.
11. State the points which merit consideration in the audit of a CLUB w.r.t its members.
Answer:

a. ENTRANCE FEE: Vouch the receipt on account of entrance fees with members’ applications,
counterfoils issued to them, as well as on a reference to minutes of the Managing Committee.
b. SUBSCRIPTIONS:
a. Vouch members’ subscriptions with the counterfoils of receipt issued to them, trace
receipts for a selected period to the Register of Members.
b. Also reconcile the amount of total subscriptions due with the amount collected and that
outstanding.
c. ARREARS OF SUBSCRIPTIONS: Ensure that arrears of subscriptions for the previous year have
been correctly brought over and arrears for the year under audit and subscriptions received
in advance have been correctly adjusted.
d. IRRECOVERABLE MEMBER DUES: See the Register of Members to ascertain the Member’s
dues which are in arrear and enquire whether necessary steps have been taken for their
recovery; the amount considered irrecoverable should be mentioned in the Audit Report.
e. MEMBER ACCOUNTS: Trace debits for a selected period from subsidiary registers maintained
in respect of supplies and services to members to confirm that the account of every member
has been debited with amounts recoverable from him.

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TEST YOUR KNOWLEDGE

Choosing of appropriate accounting policies is responsibility of management. The role of auditor

MEANING OF ASSURANCE ENGAGEMENT

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Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance is a

Nature of Audit procedures:

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(This question is related to the concept of Inherent limitations)

1. Ethical guidance may follow principles-based approach or rules-based approach.

1. MEANING: Professional skepticism refers to an attitude that includes a questioning mind,

3. PROFESSIONAL SKEPTICISM REDUCES RISKS: Maintaining professional skepticism throughout

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Qualitative aspects of the entity’s accounting practices:

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RESPONSIBILITIES OF MANAGEMENT FOR THE FINANCIAL STATEMENTS: This section of the

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In specific terms the advantages that flow may be the following:

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ELIGIBILITY TO MAKE AN APPLICATION FOR INQUIRY:

AUTHORITY TO WHOM THE APPLICATION IS TO BE MADE: The Central Registrar.

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ADVANTAGES OF AUDIT TRAIL:

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PURPOSE OF AUDIT DOCUMENTATION:

7. Define audit documentation. Also give some examples.

MEANING: Audit Documentation refers to the record of

CONTENTS OF AUDIT DOCUMENTATION: Audit Documentation include

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2. What is understood by “non-routine” transactions? Briefly outline why risks of material

1. DEFINITION: Monitoring of controls is a process to assess the effectiveness of internal control

2. ASSESSING THE EFFECTIVENESS OF CONTROLS ON A TIMELY BASIS: It involves assessing the

3. MANAGEMENT ACCOMPLISHES THROUGH ON-GOING ACTIVITIES OR SEPARATE

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4. MANAGEMENT’S MONITORING ACTIVITIES INCLUDE: Management's monitoring activities

5. IN CASE OF SMALL ENTITIES: Management s monitoring of control is often accomplished by

6. MONITORING OF CONTROLS- IF THE ENTITY HAS AN INTERNAL AUDIT FUNCTION: If the

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THE AUDITOR SHALL EVALUATE WHETHER:

ELEMENTS OF CONTROL ENVIRONMENT:

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LEADERSHIP RESPONSIBILITIES FOR QUALITY WITHIN THE FIRM:

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Initial audit engagement is an engagement in which either:

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EXAMPLES OF MATTERS THAT THE AUDITOR MAY CONSIDER IN DETERMINING WHETHER A

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The objectives of the auditor are: -

IMPACT ON AUDITORS OPINION IF MANAGEMENT IS UNWILLING TO MAKE OR EXTEND ITS

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