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Mock Test Paper - Series II: November, 2024
Date of Paper: 22nd November, 2024
Time of Paper: 2 P.M. to 5 P.M.

INTERMEDIATE: GROUP – II
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
Part I - Multiple Choice Questions

1. (b)
2. (a)
3. (a)
4. (b)
5. (b)
6. (d)
7. (b)
8. (c)
9. (a)
10. (a)
11. (a)
12. (a)
13. (c)
14. (b)
15. (b)
Part II - Descriptive Answers
1. (a) In the given situation, company’s management has not provided
complete information regarding instances of non-compliance with laws
& regulations. If the auditor has concerns about the competence,
integrity, ethical values or diligence of management, or about its
commitment to or enforcement of these, the auditor shall determine the
effect that such concerns may have on the reliability of representations
and audit evidence in general.
The above situation highlights that auditor has obtained audit evidence
relating to non-compliance with laws which is inconsistent with written
representations in this respect casting a doubt about reliability of written
representations.

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As per SA 580, “Written Representation”, if written representations are
inconsistent with other audit evidence, the auditor shall perform audit
procedures to attempt to resolve the matter. If the matter remains
unresolved, the auditor shall reconsider the assessment of the
competence, integrity, ethical values or diligence of management, or of
its commitment to or enforcement of these, and shall determine the effect
that this may have on the reliability of representations and audit evidence
in general.
If the auditor concludes that the written representations are not reliable,
the auditor shall take appropriate actions, including determining the
possible effect on the opinion in the auditor’s report in accordance with
SA 705, “Modifications to the Opinion in the Independent Auditor’s
Report” having regard to the requirement of disclaimer of opinion.
(b) In the given case, while performing tests of details on a sample in respect
of sales, misstatements have been found by CA Shubham in selected
sample pertaining to the sales transactions of small values. This
indicates observance of deviations and misstatements while performing
tests of controls and tests of details respectively in selected samples.
As per SA 530, “Audit Sampling”, in analysing the deviations and
misstatements identified, the auditor may observe that many have a
common feature, for example, type of transaction, location, product line
or period of time.
In such circumstances, the auditor may decide to identify all items in the
population that possess the common feature, and extend audit
procedures to those items. In addition, such deviations or misstatements
may be intentional, and may indicate the possibility of fraud.
Therefore, the auditor shall investigate the nature and causes of any
deviations or misstatements identified, and evaluate their possible effect
on the purpose of the audit procedure and on other areas of the audit.
In the extremely rare circumstances when the auditor considers a
misstatement or deviation discovered in a sample to be an anomaly, the
auditor shall obtain a high degree of certainty that such misstatement or
deviation is not representative of the population. The auditor shall obtain
this degree of certainty by performing additional audit procedures to
obtain sufficient appropriate audit evidence that the misstatement or
deviation does not affect the remainder of the population.
(c) In the given case, CA Srishti is performing analytical procedures as risk
assessment procedures.
Analytical procedures performed as risk assessment procedures may
identify aspects of the entity of which the auditor was unaware and may
assist in assessing the risks of material misstatement in order to provide
a basis for designing and implementing responses to the assessed risks.
Analytical procedures performed as risk assessment procedures may
include both financial and non-financial information.

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Analytical procedures may help identify the existence of unusual
transactions or events, and amounts, ratios, and trends that might
indicate matters that have audit implications. 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.
Risk assessment procedures are a basis for the identification and
assessment of risks of material misstatement at the financial statement
and assertion levels Risk assessment procedures by themselves,
however, do not provide sufficient appropriate audit evidence on which
to base the audit opinion.
Thus, it can be concluded that auditor’s opinion cannot be solely based
upon such procedures.
2. (a) Key areas that should be included in Audit engagement letter are:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the
preparation of the financial statements and
(v) Reference to the expected form and content of any reports to be
issued by the auditor and a statement that there may be
circumstances in which a report may differ from its expected form
and content.
If law or regulation prescribes in sufficient detail the terms of the audit
engagement, the auditor need not record them in a written agreement,
except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities.
(b) “When the auditor modifies the audit opinion, the auditor shall use the
heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of
Opinion,” as appropriate, for the Opinion section.” The auditor should
consider the following while expressing the opinion in accordance with
SA 705, “Modifications to the Opinion in the Independent Auditor’s
Report”.
(i) Qualified Opinion
• The auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, are material, but not
pervasive or
• The auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be material but not
pervasive.

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(ii) Adverse Opinion: The auditor shall express an adverse opinion
when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial
statements.
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when
he is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, and he concludes that the possible effects on
the financial statements of undetected misstatements, if any, could
be both material and pervasive.
(c) In the given situation, Standards on Assurance Engagements will be
applicable and such type of assurance engagement provides only a
“moderate” level of assurance.
In assurance reports involving prospective financial information, the
practitioner obtains sufficient appropriate evidence to the effect that
management’s assumptions on which the prospective financial
information is based are not unreasonable, the prospective financial
information is properly prepared on the basis of the assumptions and it
is properly presented and all material assumptions are adequately
disclosed.
“Historical financial information” and “Prospective financial information.”
The former relates to information expressed in financial terms of an entity
about economic events, conditions or circumstances occurring in past
periods. The latter relates to financial information based on assumptions
about occurrence of future events and possible actions by an entity.
Therefore, historical financial information is rooted in past events which
have already occurred whereas prospective financial information is
related to future events.
3. (a) Accounts regularized near the Balance Sheet Date:The asset
classification of borrower accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and
without scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should be
deemed as NPA.
The auditor should check for sample transactions immediately before the
closing of the financial year and immediately after the closing of the
financial year to get a knowledge of the objective behind the transactions
if they have any relation to each other in the borrower accounts or if
any/some transactions are being reversed during the first few days after
closing which might show an arrangement to prevent the Borrower
account(s) from slipping into the NPA category.
In the given case of Sidharth Industries, a payment of ₹10,00,000 was
made on March 29, 2024 reducing the outstanding loan balance to
`40,00,000. and subsequently reversed by ₹8,00,000 on April 4, 2024.
Thus, Mahavir and Associates should carefully assess the classification

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of Sidharth Industries’ Account, and determine if the payment and
reversal transactions indicate an attempt to prevent the account from
slipping into the NPA category. If yes, the account should be classified
as an NPA in compliance with regulatory guidelines.
(b) The following points need to be considered while auditing income and
expenditure items of a club: -
(1) 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.
(2) Subscriptions: Vouch members’ subscriptions with the counterfoils
of receipt issued to them, trace receipts for a selected period to the
Register of Members; also reconcile the amount of total
subscriptions due with the amount collected and that outstanding.
(3) 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.
(4) Arithmetical accuracy: - Check totals of various columns of the
Register of members and tally them across.
(5) 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.
(6) Pricing: Verify the internal check as regards members being
charged with the price of foodstuffs and drinks provided to them
and their guests, as well as, with the fees chargeable for the special
services rendered, such as billiards, tennis, etc.
(7) 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.
(8) Purchases: Vouch purchase of sports items, furniture, crockery,
etc. and trace their entries into the respective inventory registers.
(9) 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.
(10) Management Powers: Examine the financial powers of the
secretary and, if these have been exceeded, report specific case
for confirmation by the Managing Committee.

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(c) Reporting requirements of a fraud under the CARO 2020: The auditor
is required to report the fraud under clause (xi) of Paragraph 3 of CARO
2020:
(a) whether any fraud by the company or any fraud on the company
has been noticed or reported during the year, if yes, the nature and
the amount involved is to be indicated;
(b) whether any report under sub-section (12) of section 143 of the
Companies Act has been filed by the auditors in Form ADT-4 as
prescribed under rule 13 of Companies (Audit and Auditors) Rules,
2014 with the Central Government;
(c) whether the auditor has considered whistle-blower complaints, if
any, received during the year by the company;
4. (a) The audit procedures to be performed by CA Karan to test completeness
assertion relating to intangible assets are as under: -
• Verify the movement in the intangible assets schedule compiled by
the management i.e. Opening balances + Additions – Deletions =
Closing balances. Tally the closing balances to the entity’s books of
account.
• Check the arithmetical accuracy of the movement in intangible assets
schedule.
• For additions during the period under audit, obtain a listing of all
additions from the management and undertake the following
procedures: -
 For all material additions, verify whether such expenditure
meets the criterion for recognition of an intangible asset as per
AS 26.
 Ensure that no intangible asset arising from research (or from
the research phase of an internal project) should be recognised.
Expenditure on research (or on the research phase of an internal
project) should be recognised as an expense when it is incurred.
Check the certificate or report or other similar documentation
maintained by the entity to verify the date of use of the intangible
which could be linked to date of commencement of commercial
production/ economic use to the entity, for all additions to
intangible assets during the period under audit.
 Verify whether the additions (acquisitions) have been approved
by appropriate entity’s personnel.
 Verify whether proper internal processes and procedures like
inviting competitive quotations/ proper tenders etc. were
followed prior to finalizing the vendor for procuring item of
intangible assets by testing those documents on a sample basis.
 In relation to deletions of intangible assets, understand from the
management the reason and rationale for deletion and the
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manner of disposal. Obtain the management approval and
disposal note authoring disposal of the asset from its active use.
Verify the process followed for sale of discarded asset, for
example inviting competitive quotes, tenders and the basis of
calculation of sales proceeds. Verify that the management has
accurately recorded the deletion of intangible asset (original cost
and accumulated amortization up to the date of disposal) and
the resultant gain/ loss on disposal in the entity’s books of
account.
(b) The auditor shall design and perform tests of controls to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant
controls when: -
(i) The auditor’s assessment of risks of material misstatement at the
assertion level includes an expectation that the controls are
operating effectively (i.e., the auditor intends to rely on the
operating effectiveness of controls in determining the nature, timing
and extent of substantive procedures) or
(ii) Substantive procedures alone cannot provide sufficient appropriate
audit evidence at the assertion level.
In designing and performing tests of controls, the auditor shall obtain
more persuasive audit evidence, the greater the reliance the auditor
places on the effectiveness of a control.
A higher level of assurance may be sought about the operating
effectiveness of controls when the approach adopted consists primarily
of tests of controls, in particular, where it is not possible or practicable
to obtain sufficient appropriate audit evidence only from substantive
procedures.
(c) Consider the factors that, in the auditor’s professional judgment,
are significant in directing the engagement team’s efforts.
The auditor needs to direct efforts of engagement team towards matters
that in his professional judgment are significant. Preliminary
identification of material classes of transactions, account balances and
disclosures help auditor in establishing overall audit strategy. More
attention need to be devoted to significant matters to obtain desired
outcomes.
Examples of the factors that need to be considered by CA Ravi for
establishing audit strategy are: -
• Volume of transactions which may determine whether it is more
efficient for the auditor to rely on internal control.
• Significant industry developments such as changes in industry
regulations and new reporting requirements.
• Significant changes in the financial reporting framework, such as
changes in accounting standards.

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• Other significant relevant developments, such as changes in the
legal environment affecting the entity.
5. (a) The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file on
a timely basis after the date of the auditor’s report.
 SQC 1 “Quality Control for Firms that perform Audits and Review
of Historical Financial Information, and other Assurance and related
services”, requires firms to establish policies and procedures for
the timely completion of the assembly of audit files.
 An appropriate time limit within which to complete the assembly of
the final audit file is ordinarily not more than 60 days after the date
of the auditor’s report. The completion of the assembly of the final
audit file after the date of the auditor’s report is an administrative
process that does not involve the performance of new audit
procedures or the drawing of new conclusions.
 Changes may, however, be made to the audit documentation
during the final assembly process, if they are administrative in
nature.Examples of such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file
assembly process.
• Documenting audit evidence that the auditor has obtained,
discussed and agreed with the relevant members of the
engagement team before the date of the auditor’s report.
 After the assembly of the final audit file has been completed, the
auditor shall not delete or discard audit documentation of any
nature before the end of its retention period.
 SQC 1 requires firms to establish policies and procedures for the
retention of engagement documentation. The retention period for
audit engagements ordinarily is no shorter than seven years from
the date of the auditor’s report, or, if later, the date of the group
auditor’s report.
(b) While recognising that exceptions may exist, the following
generalisations about the reliability of audit evidence may be useful:
• The reliability of audit evidence is increased when it is obtained
from independent sources outside the entity.
• The reliability of audit evidence that is generated internally is
increased when the related controls, including those over its
preparation and maintenance, imposed by the entity are effective.
• Audit evidence obtained directly by the auditor is more reliable than
audit evidence obtained indirectly or by inference.
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• Audit evidence in documentary form, whether paper, electronic, or
other medium, is more reliable than evidence obtained orally
• Audit evidence obtained as original documents is more reliable
than audit evidence obtained as photocopies or facsimiles, or
documents that have been filmed, digitised or otherwise
transformed into electronic form because in these cases the
reliability of which may depend on the controls over their
preparation and maintenance.
(c) To verify the rights and obligations assertion regarding Property, Plant,
and Equipment (PPE), the auditor must ensure the entity has valid legal
ownership and identify any charges against it. The audit procedures
should include the following:
• 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 and building in particular, the auditor should
check the conveyance deed/ sale deed to verify whether the entity
is the legal and valid owner or not.
• The auditor should insist and verify title deeds for immoveable
property acquired.
• In case, the entity has given such immoveable property as security
for any borrowings and the original title deeds are not likely to be
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.
• The auditor should also verify the register of charges, available with
the entity to assess that any charge has been created against the
PPE.
6. (a) There is a direct relationship between an entity’s objectives and the
control it implements to provide reasonable assurance about their
achievement. FDP Ltd. has implemented internal controls addressing
financial reporting, operational efficiency, and compliance. However, not
all of these objectives and controls are relevant to the auditor’s risk
assessment.
Factors relevant to the auditor’s judgment about whether a control,
individually or in combination with others, is relevant to the audit may
include such matters as the following:
• Materiality.
• The significance of the related risk.
• The size of the entity.
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• The nature of the entity’s business, including its organisation and
ownership characteristics.
• The diversity and complexity of the entity’s operations.
• Applicable legal and regulatory requirements.
• The circumstances and the applicable component of internal
control.
• The nature and complexity of the systems that are part of the
entity’s internal control, including the use of service organisations.
• Whether, and how, a specific control, individually or in combination
with others, prevents, or detects and corrects, material
misstatement.
In the given case, CA Karan suggests that all controls should be
assessed to mitigate the risk of material misstatement in the financial
statements, while CA Rajat is of the view that only those controls
deemed relevant to the audit should be assessed based on professional
judgment.
Based on the factors mentioned above, it can be concluded that the
auditors should assess only those controls deemed relevant to mitigate
the risk of material misstatement in FDP Ltd.'s financial statements.
(b) The advantages of an audit programme are:
• It provides the assistant carrying out the audit with total and clear
set of instructions of the work generally to be done.
• It is essential, particularly for major audits, to provide a total
perspective of the work to be performed.
• Selection of assistants for the jobs on the basis of capability
becomes easier when the work is rationally planned, defined and
segregated.
• Without a written and pre-determined programme, work is
necessarily to be carried out on the basis of some ‘mental’ plan. In
such a situation there is always a risk of ignoring or overlooking
certain books and records. Under a properly framed programme,
such risk is significantly less and the audit can proceed
systematically.
• The assistants, by putting their signature on programme, accept the
responsibility for the work carried out by them individually and, if
necessary, the work done may be traced back to the assistant.
• The principal can control the progress of the various audits in hand
by examination of audit programmes initiated by the assistants
deputed to the jobs for completed work.
• It serves as a guide for audits to be carried out in the succeeding
year.

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• A properly drawn up audit programme serves as evidence in the
event of any charge of negligence being brought against the
auditor. It may be of considerable value in establishing that he
exercised reasonable skill and care that was expected of
professional auditor.
(c) The statutory auditor of Ginni 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 March 31st, 2024.
• Vouch recorded purchases to underlying documentation (purchase
requisition, purchase order, receiving report, vendor invoice and
cancelled cheque or payment file).
• Evaluate the consigned goods.
• Examine client correspondence, sales and receivables records,
purchase documents.
• Determine existence of collateral agreements.
• Review consignment agreements.
• Review material purchase commitment agreements.
• Examine invoices for evidence of ownership i.e. the invoices shall
be in the name of the client.
• 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.
OR
Significant shortage of skilled labour, inability to pay creditors on time
and overall liquidity crisis faced by the company are examples of events
or conditions that, individually or collectively, may cast significant doubt
on the entity’s ability to continue as a going concern.
In such a situation, management should try to address auditor’s
concerns by preparing its future plan of action including preparation of
cash flow forecast showing inflow and outflow of cash. Such a cash flow
forecast should address auditor’s concerns regarding liquidity crisis
being faced by the company.
The auditor should perform audit procedures to evaluate the reliability of
the underlying data to prepare the forecast and determining whether
there is adequate support for the assumptions underlying the forecast.
The auditor should also consider whether any additional facts or
information have become available since the date on which management
made its assessment.
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