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AUDITING & ETHICS Duration: 180

Details: Full Test 2 Marks: 100

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets in
arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge your
performance.

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Case Study I:

1. Answer: d) The auditor shall express a qualified opinion

Explanation: According to SA 705 (Revised), "Modifications to the Opinion in the Independent

Auditor’s Report," if the financial statements contain a material misstatement due to non-
disclosure of the default in repayment of loan installments, the auditor would express a
qualified opinion. The auditor would modify the opinion by adding an explanatory paragraph to
the audit report, indicating the nature of the departure from the accounting framework.

In this case, the default in loan payments is a material fact that needs to be disclosed, and the
absence of such disclosure would lead to a qualified opinion.

2. Answer: a) The auditor should assess if a provision or contingent liability disclosure is

required as per the applicable accounting standards

Explanation: SA 450 requires the auditor to evaluate the effect of identified misstatements on
the financial statements and to consider whether adjustments are necessary. In the case of the
income tax demand notice, the auditor should assess whether a provision or contingent liability
disclosure is required based on the applicable accounting standards, regardless of
management's belief that the demand will be set aside. The auditor's responsibility is to ensure
that the financial statements are presented fairly in accordance with the applicable financial
reporting framework.

3. Answer: a) Drawing attention to the impact of the fire incident as a subsequent event

Explanation: According to SA 560 (Subsequent Events), if a significant event occurs after the
balance sheet date but before the financial statements are issued, the auditor should evaluate
the impact of that event on the financial statements. In this case, drawing attention to the

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impact of the fire incident as a subsequent event in the auditor's report would be an
appropriate way to communicate the event to the users of the financial statements. This allows
for transparency and provides relevant information about an event that occurred after the
balance sheet date.

4. Answer: d) The auditor can rely solely on management’s written representation about
subsequent events

Explanation: According to SA 560, while management's written representation can be

considered as a source of audit evidence, the auditor cannot rely solely on it. The auditor is
required to perform audit procedures to obtain sufficient appropriate audit evidence about
events after the balance sheet date. The auditor should not solely rely on management's
representations and should perform procedures to identify events that may require adjustment
of, or disclosure in, the financial statements.

Therefore, the correct answer is d) the auditor can rely solely on management’s written
representation about subsequent events. I appreciate your patience and understanding.

5. Answer: b) Both I and II

Explanation: As per SA 260 (Communication with Those Charged with Governance), both the
audit plan and strategy (I) and significant risks identified during the audit (II) are matters that
require communication with those charged with governance. The communication with those
charged with governance helps ensure that they are informed about key aspects of the audit
process and significant findings that may affect the financial statements.

(2×5= 10 Marks)

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Case Study II:

6. Answer: (d) Twenty percent of the total number of shares or of the value of shareholding
up to ₹1,000

Explanation: Section 5 of the Central Act states that in the case of a society where the liability
of a member is limited, no member other than a registered society can hold such portion of the
share capital of the society as would exceed a maximum of twenty percent of the total number
of shares or the value of shareholding to a specified amount, which is ₹1,000 in this case.

7. Answer: (b) A member and, with the special sanction of the Registrar, another registered
society.

Explanation:

The section implies that a cooperative society can give loans to its members, but there are
restrictions. In the case of Green Harvest, it can give loans to its members, subject to certain
conditions.

Additionally, with the special sanction of the Registrar, Green Harvest can provide loans to
another registered society. This means that any loan beyond the scope of lending to members
requires approval from the Registrar of Co-operative Societies.

This provision aims to ensure responsible and regulated lending practices by cooperative
societies, safeguarding the interests of both members and the broader cooperative movement.

8. Answer: (c) 6 months to 5 years and more than 5 years.

Explanation: Examination of overdue debts - Overdue debts for a period from 6 months to 5
years and more than 5 years will have to be classified and shall have to be reported by an
auditor. Overdue debts have far reaching consequences on the working of a credit society. It

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affects its working capital position. A further analysis of these overdue debts from the
viewpoint of chances of recovery will have to be made, and they will have to be classified as
good or bad. The auditor will have to ascertain whether proper provisions for doubtful debts
are made and whether the same is satisfactory.

9. Answer: (a) Registrar of Co-operative Societies.

Explanation: The Registrar of Co-operative Societies is responsible for supervising and

regulating the functioning of cooperative societies. Reporting to this authority ensures that an
independent and competent body reviews the transactions and takes appropriate action to
address any issues. It enhances transparency, accountability, and the overall integrity of the
cooperative society.

(2×4= 8 Marks)

GENERAL MCQS

10. Answer: d. Standards on Auditing (SAs)

Explanation:

The audit of historical financial information, such as the financial statements of ABC Ltd., falls
under the purview of Standards on Auditing (SAs). These standards provide guidelines for
auditors to ensure the quality and reliability of financial information.

(2 marks)

11. Answer: a. Sampling risk.

Explanation:

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Sampling risk is the risk that the auditor's conclusion based on a sample might differ from the
conclusion they would have reached if they had examined the entire population. In this case,
the auditor is only examining 50 invoices out of 500, so there's a chance that the sample might
not be fully representative of the entire population.

Here's a breakdown of why the other options are not correct:

Non-sampling risk: This type of risk is not related to sampling but rather to factors such as
errors in judgment, misunderstanding of accounting principles, or misinterpretation of
evidence.

Inherent risk: This risk is associated with the susceptibility of an account balance or class of
transactions to material misstatement, regardless of the internal controls in place. It's not
directly related to sampling.

Control risk: This risk is the risk that a misstatement that could occur will not be prevented or
detected by the entity's internal control. It's also not directly related to sampling.

Key points to remember about sampling risk:

It can be reduced by increasing the sample size, but it can never be eliminated entirely.

Auditors use statistical methods to quantify and manage sampling risk.

The auditor's assessment of sampling risk is a key factor in determining the appropriate sample
size for a particular audit procedure.

12. Answer: c. Goods received note.

Explanation:

Purchase invoice: While created internally by XYZ Corporation, it originates from the supplier
and reflects the cost of purchased goods, so it's considered external evidence.

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Supplier's challan and forwarding note: These documents originate from the supplier and
provide details about the shipment of goods, making them external evidence.

Quotations: Though originated internally, quotations rarely provide direct support for financial
statement assertions like purchase transactions. They might be relevant for budgeting or
procurement processes, but not specifically for the audit of financial statements.

Goods received note: This document is created internally by XYZ Corporation upon receiving
goods from the supplier. It details the quantity and type of goods received, along with a
reference to the purchase order and supplier invoice. This serves as an internal record of
inventory received and aligns with the purchase transaction, thereby forming internal evidence
for the audit.

Therefore, the goods received note directly supports the internal control over purchases and
inventory within XYZ Corporation, making it the most relevant example of internal evidence for
the audit.

13. Answer: b. Yes, they can be applied to areas beyond account balances.

Explanation:

While external confirmation procedures are commonly used to verify account balances, their
application extends beyond that. Auditors can effectively use them to gather reliable evidence
in various areas of an audit.

Here are examples of how external confirmations can be applied beyond account balances:

Confirming terms of agreements or contracts: Auditors can request confirmation from third
parties to verify the terms and conditions of contracts, leases, or other agreements. This helps
ensure the accuracy of related financial statement disclosures and accounting treatments.

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Confirming transactions: Auditors can confirm specific transactions with third parties involved,
such as confirming sales with customers, purchases with suppliers, or loan details with lenders.
This provides independent evidence of the occurrence and accuracy of these transactions.

Confirming the absence of certain conditions: Auditors can use confirmations to verify the
absence of side agreements, legal claims, or contingent liabilities that could impact the financial
statements

Confirming the existence of assets: Auditors can request confirmation from third parties who
hold or control assets on behalf of the entity, such as banks holding securities or warehouses
storing inventory

Key considerations for external confirmations:

Reliability: External confirmations are generally considered highly reliable audit evidence due
to their independence from the entity being audited.

Cost-effectiveness: Auditors must weigh the benefits of external confirmations against their
cost and time requirements.

Response rates: The effectiveness of confirmations depends on obtaining responses from third
parties. Auditors may need to follow up with non-respondents.

Risk assessment: The use of external confirmations is often guided by the auditor's assessment
of risks associated with specific accounts or assertions.

14. Answer: c. Recorded as other income on the transfer of title, based on the difference
between the redemption price and carrying value of the investments.

Explanation:

Option a: Gain or loss isn't recognized upon purchase. The initial cost becomes the carrying
value.

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Option b: Mark-to-market accounting isn't generally used for mutual funds held by non-
financial entities. They are recorded at historical cost until sale.

Option d: Cash receipt doesn't determine recognition of gain or loss. The transfer of title
(settlement of the sale) triggers the event.

Therefore, when an entity sells mutual fund investments, the gain or loss is calculated as the
difference between the received redemption price and the carrying value (original cost
adjusted for any capital gains distributions). This gain or loss is then typically recorded as "other
income" in the income statement for the period in which the transfer of title takes place.

It's important to note that specific accounting standards and rules for recording investment
gains and losses might vary depending on the jurisdiction and the type of entity preparing the
financial statements. This explanation provides a general framework.

15. Answer: c. on a timely basis after the date of the auditor’s report.

Explanation:

Here's a breakdown of the key points regarding the completion of the final audit file:

Timing: The administrative process of assembling the final audit file should be completed on a
timely basis after the date of the auditor's report. This typically means within a reasonable
timeframe, such as 60 days or less.

Reason for delay: The file is not completed on the date of the auditor's report because there
might be additional administrative tasks to finalize, such as:

Gathering and organizing remaining documentation

Completing final review and approval processes

Resolving any outstanding issues or questions

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Not before the audit: It's not feasible to complete the final file before the audit engagement
begins, as the audit evidence and documentation are gathered throughout the audit process.

Not solely upon client request:

While a client might request access to the final audit file, its completion is not solely driven by
client requests. It's a crucial part of the auditor's quality control procedures and compliance
with professional standards.

Key considerations for timely completion:

Regulatory requirements: Auditing standards and regulations often specify timeframes for
completing the final audit file.

Firm policies: Audit firms typically have internal policies and procedures outlining timelines for
file completion.

Quality control: Timely completion is essential for maintaining audit quality and ensuring
proper documentation of the audit process.

Future reference: A well-organized and complete final audit file serves as a valuable resource
for future audits, reviews, or potential inquiries.

16. Answer: c. Management with appropriate responsibilities for the financial statements.

Explanation:

Written representations are formal statements obtained from management acknowledging

their responsibility for the financial statements and confirming certain matters relevant to the
audit.

Management, specifically those with overall responsibility and knowledge of the financial
statements, are directly accountable for their accuracy and completeness. This typically
includes individuals such as the CEO, CFO, and other key finance executives.

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While all employees contribute to the financial statements indirectly through their work, only
those with specific authority and control over the reporting process possess the necessary
knowledge and accountability to provide meaningful written representations.

Shareholders and external consultants, though stakeholders in the company, lack the direct
responsibility and knowledge of the financial statements to provide relevant and reliable
written representations.

Therefore, requesting written representations from management with appropriate financial

statement responsibilities aligns with best practices and effectively strengthens the audit
evidence gathered by the auditor.

17. c. Key members of the engagement team from each of the joint auditors

Explanation:

According to SA 299 (Revised), "Joint Audit of Financial Statements," the planning of a joint
audit involves key members of the engagement team from each of the joint auditors. This
means that representatives from each auditing firm participating in the joint audit should be
actively involved in the planning process.

The rationale behind involving key members from each joint auditor is to ensure a
comprehensive and well-coordinated approach to planning. This inclusion allows for the
integration of different perspectives, expertise, and insights from each audit firm, contributing
to the effectiveness and efficiency of the joint audit. The collaboration in planning helps in
establishing a clear understanding of the audit scope, timing, and direction, aligning with the
overall objectives of the auditor as outlined in SA 200.

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18. Answer: b. Mr. Smith

Explanation:

In the context of a hire-purchase agreement, the "hirer" is the person who obtains or has
obtained possession of goods under the agreement. In this case, Mr. Smith is the customer
entering into the hire-purchase agreement with ABC Electronics, making him the hirer.

19. Answer: c. Equitable charge

Explanation:

Hypothecation creates an equitable charge on moveable securities. An equitable charge is a

charge created not by an express enactment but by equity and reason. In the context of
hypothecation, it involves the creation of a charge on moveable assets without transferring
ownership or possession to the lending bank.

20. Answer: b. Familiarity threat

Explanation:

A long association between specific auditors and their specific client counterparts can lead to a
familiarity threat. This threat arises when auditors become too familiar or sympathetic with the
client's interests, potentially compromising their objectivity and independence during the audit
process.

(1×10= 10 Marks)

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 Division B

Ans-1 (a) In conducting audit of financial statements, objectives of auditor in accordance with
SA-200 “Overall Objectives of the Independent auditor and the conduct of an audit in
accordance with Standards on Auditing” are: -

(a) To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and

(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.

An analysis of above brings out following points clearly: -

(1) Auditor’s objective is to obtain a reasonable assurance whether financial statements as a

whole are free from material misstatement whether due to fraud or error.

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.

Audit of financial statements is carried out by the auditor with professional competence and
skills in accordance with Standards on Auditing. Audit procedures are applied in accordance
with SAs, audit evidence is obtained and evaluated. On the basis of that, conclusions are drawn
and opinion is formed. It leads to high level of assurance which is called as reasonable
assurance but it is not absolute assurance.

(2) Misstatements in financial statements can occur due to fraud or error or both. The auditor
seeks to obtain reasonable assurance whether financial statements as a whole are free from
material misstatements caused by fraud or error. He has to see effect of misstatements on
financial statements as a whole, in totality.

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(3) Obtaining reasonable assurance that financial statements as a whole are free from material
misstatements enables the auditor to express an opinion on whether the financial statements
are prepared, in all material respects, in accordance with an applicable financial reporting
framework.

(4) The opinion is reported and communicated in accordance with audit findings through a
written report as required by Standards on Auditing.

Therefore, perception of both assistants is not proper. Auditor of financial statements does not
seek to provide guarantee that financial statements are free from material misstatements
caused by frauds or errors. He obtains reasonable assurance.

(4 marks)

Ans-1 (b) Sample audit programme pertaining to purchases

Name of Concern : Broad Industries

Financial Year : 20XX-XX

Prepared by : Name of person with date

Reviewed by : Name of person with date

Approved by : Name of person with date

S.no. Nature of Extent of Check Basis of Sample Done by

Procedure
(a) Vouch few
purchase
invoices of paper
from purchase
records of

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 concern.
(b) Trace these
invoices into
account books of
concern.
(c) Verify few
purchase
invoices of paper
on GST portal.
(d) Trace few
purchase
invoices of paper
in stock records
to ensure that
these have been
added to stocks
of raw material.

(4 marks)

Ans-1 (c) There is a possibility that planned audit procedures may not achieve desired result
and fail to detect misstatements in revenue recognition. Such a risk is referred to as “detection
risk”.

SA 200 defines detection risk as the risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement that exists and that
could be material, either individually or when aggregated with other misstatements.

For example, auditor of a company uses certain audit procedures for the purpose of obtaining
audit evidence and reducing audit risk, but still there will remain a risk that audit procedures

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used by the auditor may not be able to detect a misstatement which by nature is material, then
that risk is known as detection Risk.

Detection risk comprises sampling and non-sampling risk.

(a) 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. It
simply means that the sample was not representative of the population from which it was
chosen.

(b) Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any
reason not related to sampling risk. Like an auditor may reach an erroneous conclusion due to
application to some inappropriate audit procedure.

(3 marks)

Ans-1 (d) Disclosure in case of Benami Properties held by the Company: Where any proceedings
have been initiated or pending against the company for holding any benami property under the
relevant law relating to prohibition of such transactions, the company shall disclose the
following: -

(a) Details of such property, including year of acquisition

(b) Amount thereof

(c) Details of Beneficiaries

(d) If property is not in the books, then the fact shall be stated with reasons

(e) Where there are proceedings against the company under this law as an abetter of the
transaction or as the transferor, then the details shall be provided

(f) Nature of proceedings, status of same and company’s view on same.

(3 marks)

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Ans-2(a) ABC Ltd. raises funds through an initial public offering (IPO) or further public offer, the
auditor is required following 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;

(4 Marks)

Ans-2(b) Adequate planning plays a crucial role in the audit process and can offer several
benefits to Ravi & Associates as they prepare for the audit of TechPro Solutions. Here are four
specific benefits:

Devoting Appropriate Attention: Proper planning allows Ravi & Associates to identify key areas
in TechPro Solutions where a focused audit effort is essential, such as revenue recognition in
software sales and compliance with evolving tech industry standards

Timely Problem Identification: Through planning, potential challenges in areas like

cybersecurity protocols and intellectual property valuation can be preemptively recognized and
resolved, preventing last-minute disruptions in the audit process.

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Effective and Efficient Audit Execution: Planning ensures a streamlined audit process, enabling
Ravi & Associates to allocate resources efficiently, schedule audit procedures effectively, and
meet critical deadlines during the busy audit season.

Selection of Competent Team Members: Adequate planning aids in identifying the requisite
skills for auditing a technology company. Ravi & Associates can ensure that team members
possess the necessary technical expertise to address intricate IT systems and software
valuation.

(4 Marks)

Ans-2(c) SA 580- Written representations deals with the auditor’s responsibility to obtain
written representations from management and, where appropriate, those charged with
governance.

Objectives of auditor in accordance with SA 580

(a) To obtain written representations from management and, where appropriate, those
charged with governance that they believe that they have fulfilled their responsibility for the
preparation of the financial statements and for the completeness of the information provided
to the auditor;

(b) To support other audit evidence relevant to the financial statements or specific assertions in
the financial statements by means of written representations, if determined necessary by the
auditor or required by other SAs; and

(c) To respond appropriately to written representations provided by management and, where

appropriate, those charged with governance, or if management or, where appropriate, those
charged with governance do not provide the written representations requested by the auditor.

In summary, SA 580 underscores the importance of written representations in the audit

process, not only as a confirmation of responsibilities fulfilled but also as a supportive tool for

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other audit evidence. The auditor's objectives include obtaining, using, and responding to these
representations in a manner that ensures a comprehensive and reliable audit of XYZ Limited's
financial statements.

(3 Marks)

Ans-2(d) Standards on Related Services

These standards apply in engagements to perform agreed-upon procedures regarding financial

information. For example, an engagement to perform agreed-upon procedures may require the
auditor to perform certain procedures concerning individual items of financial data, say,
accounts payable, accounts receivable, purchases from related parties and sales and profits of a
segment of an entity, or a financial statement, say, a balance sheet or even a complete set of
financial statements.

An engagement in which practitioner may be called upon to assist management with the
preparation and presentation of historical financial information without obtaining assurance on
that information. Such type of compilation engagements fall in the category of related services
and practitioner issues a report clearly stating that it is not an assurance engagement and no
opinion is being expressed.

These types of services are called related services and standards have been issued to deal with
practitioner’s responsibilities in this regard.

Examples of Standards on related services are:

♦ SRS 4400 Engagements to perform agreed-upon procedures regarding financial information

♦ SRS 4410 (Revised) Compilation engagements

It is to be clearly understood that all the standards i.e., Standards on Auditing (SAs), Standards
on Review Engagements (SREs), Standards on Assurance Engagements (SAEs) and Standards on
related services (SRSs) are collectively known as the Engagement Standards.

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 (3 Marks)

Ans-3(a)

Categories of Non-Performing Assets: Provision required:

Substandard Assets:
Would be one, which has remained NPA for a period less than or 15%
equal to 12 months.
Doubtful Assets:
Would be one, which has remained in the substandard category for
a period of 12 months.
Sub-categories:
Doubtful up to 1 Year (D1) (Secured + Unsecured)
Doubtful 1 to 3 Years (D2) 25% + 100%
Doubtful more than 3 Years (D3) 40% + 100%
100% + 100%
Loss Assets:
Would be one, where loss has been identified by the bank or
internal or external auditors or the RBI inspection but the amount 100%
has not been written off wholly.
Important Note:

1. Classification as NPA should be based on the record of recovery. Availability of security or net
worth of borrower/guarantor is not to be taken into account for purpose of treating an advance
as NPA or otherwise.

2. Asset classification would be borrower-wise and not facility-wise. All facilities including
investments in securities would be termed as NPA.

(4 Marks)

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Ans-3(b) CA Priya's should cover the following aspects:

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 need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.

7. The audit methodology and tools used.

Examples of Audit Documentation

 Audit documentation may be recorded on paper or on electronic or other media.

 Audit Documentation include:
 Audit programmes.
 Analyses.
 Issues memoranda.
 Summaries of significant matters.
 Letters of confirmation and representation.
 Checklists.
 Correspondence (including e-mail) concerning significant matters.

(4 Marks)

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Ans-3(c) In today’s digital age when companies rely on more and more on IT systems and
networks to operate business, the amount of data and information that exists in these systems
is enormous. The combination of processes, tools and techniques that are used to tap vast
amounts of electronic data to obtain meaningful information is called data analytics. While it is
true that companies can benefit immensely from the use of data analytics in terms of increased
profitability, better customer service, gaining competitive advantage, more efficient operations,
etc., even auditors can make use of similar tools and techniques in the audit process and obtain
good results.

The tools and techniques that auditors use in applying the principles of data analytics are
known as Computer Assisted Auditing Techniques or CAATs in short. 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:

 Check completeness of data and population that is used in either test of controls or
substantive audit tests.
 Selection of audit samples – random sampling, systematic sampling.
 Re-computation of balances – reconstruction of trial balance from transaction data.
 Reperformance of mathematical calculations – depreciation, bank interest calculation.
 Analysis of journal entries
 Fraud investigation.
 Evaluating impact of control deficiencies.

In conclusion, the integration of data analytics, particularly through CAATs, equips auditors like
Mr. Sharma with powerful tools to navigate the complexities of auditing in a technology-driven
environment. These tools enhance the precision of audit procedures, contributing to a more
thorough assessment of TechGen Corporation's financial health and internal controls.

(3 Marks)

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Ans-3(d) Exemption Criteria under Section 143(3)(i): Section 143(3)(i) of the Companies Act,
2013 outlines the criteria for exemption from reporting on internal financial controls (IFC).
According to this section, certain private companies are exempt from the requirement to
include in their auditor's report a statement on IFC. The exemption is based on specific financial
thresholds, and private companies meeting these criteria are relieved from the obligation to
provide detailed disclosures on the adequacy and effectiveness of their internal financial
controls.

This requirement shall not apply to a private company which –

(i) is One Person Company or a small company; or

(ii) has turnover less than ₹ 50 crore as per latest audited Financial Statements; and which has
aggregate borrowings from banks or financial institutions or anybody corporate at any point of
time during the financial Year for less than ₹ 25 crore.

(3 Marks)

Ans-4(a) Trade receivables are an essential part of any organisation's balance sheet. Often
referred to as debtors, these are monies which are owed to an organisation by a customer. The
most common form of an account receivable is a sale made on credit, via an invoice, to a
customer. Typically, an invoice is raised and issued to the customer with the invoice amount
being recorded as a debtor balance.

Until the invoice is paid, the invoice amount is recorded on the organization’s balance sheet as
accounts receivable. If balances are not recoverable, then these amounts will need to be
written off as an expense in the income statement/ profit and loss account.

It is important to carry out compliance procedures in the sales audit as part of the debtors’
audit procedure.

In summary, check to ensure that the system for receivables has the following features:

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 Only bona fide sales lead to receivables
 Sales are made to approved customers
 All such sales are duly recorded in the books
 Once recorded, the debts can only be eliminated by receipt of cash or on the authority of
responsible official
 Debts are collected promptly
 Balances are regularly reviewed and aged , a proper system of follow up exists and if
necessary adequate provision for bad debt exists
 Clear segregation of duties relating to identification of debt, receipt of income,
reconciliations and write off of debts

(4 Marks)

Ans-4(b) Verification of Inventory: As per SA 510 “Initial Audit Engagements – Opening

Balances”, 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-

(i) Opening balances contain misstatements that materially affect the current period’s financial
statements; and

(ii) 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.

When the financial statements for the preceding period were audited by predecessor auditor,
the current auditor may be able to obtain sufficient appropriate audit evidence regarding
opening balances by perusing the copies of the audited financial statements including the other
relevant documents relating to the prior period financial statements such as supporting
schedules to the audited financial statements. Ordinarily, the current auditor can place reliance

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on the closing balances contained in the financial statements for the preceding period, except
when during the performance of audit procedures for the current period the possibility of
misstatements in opening balances is indicated.

General principles governing verification of assets require that the auditor should confirm that
assets have been correctly valued as on the Balance Sheet date. The contention of the
management that the inventory has not undergone any change cannot be accepted, it forms
part of normal duties of auditor to ensure that the figures on which he is expressing opinion are
correct and properly valued. Moreover, it is also quite likely that the inventory lying as it is
might have deteriorated and the same need to be examined. The auditor is advised not to
exclude the audit of closing inventory from his audit programme.

(4 Marks)

Ans-4(c) Stratified Sampling: 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. Each stratum is
treated as if it was a separate population and if proportionate of items are selected from each
of these stratum. The number of groups into which the whole population has to be divided is
determined on the basis of auditor judgment.

Example

1. In the above case, trade receivables balances may be divided into four groups as follows:-

(a) balances in excess of Rs. 10,00,000;

(b) balances in the range of Rs. 7,75,001 to Rs. 10,00,000;

(c) balances in the range of Rs. 5,50,001 to Rs. 7,75,000;

(d) balances in the range of Rs. 2,25,001 to Rs. 5,50,000; and

(e) balances Rs. 2,25,000 and below.

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From these above groups the auditor may pick up different percentage of items from each of
the group. From the top group i.e. balances in excess of Rs. 10,00,000, the auditor may examine
all the items; from the second group 25 per cent of the items; from the third group 10 per cent
of the items; and from the lowest group 2 per cent of the items may be selected. Random
sample is chosen from each stratum using random number tables.

The reasoning behind the stratified sampling is that for a highly diversified population, weights
should be allocated to reflect these differences. This is achieved by selecting different
proportions from each strata. It can be seen that the stratified sampling is simply an extension
of simple random sampling.

(3 Marks)

Ans-4(d) In the case of a nationalised bank, the auditor is required to make a report to the
Central Government in which he has to state the following:

(a) Whether, in his opinion, the financial statements present a true and fair view of the affairs
of the bank and in case he had called f or any explanation or information, whether it has been
given and whether it is satisfactory;

(b) Whether or not the transactions of the bank, which have come to his notice, have been
made within the powers of that bank;

(c) Whether or not the returns received from the offices and branches of the bank have been
found adequate for the purpose of his audit; and

(d) Any other matter which he considers should be brought to the notice of the Central
Government.

The report of auditors of State Bank of India is also to be made to the Central Government and
is almost identical to the auditor’s report in the case of a nationalised bank.

(3 Marks)

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Ans-5(a) Agreement on Audit Engagement Terms: As per SA 210, “Agreeing the Terms of
Audit Engagements”, the auditor shall agree the terms of the audit engagement with
management or those charged with governance, as appropriate. Subject to prescribed details
under Law or Regulations, the agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written agreement and shall include:

(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.

In the given scenario, ABC Corporation appointed Mr. P, Mr. Q and Mr. R, as its joint auditors
for the year 2023-24 and issued engagement letter to all of them. The engagement letter
contains the details on objective and scope of audit, responsibilities of auditor, identification of
framework applicable and reference to expected form and content of report from all three joint
auditors. However, engagement letter issued by ABC Corporation does not specify the
responsibilities of management, whereas as per SA 210, it should also specify responsibilities of
management.

(4 Marks)

Ans-5(b) An LLP shalt be under obligation to maintain annual accounts reflecting true and fair
view of its state of affairs. The accounts of every LLP shall be audited in accordance with Rule
24 of LLP Rules 2009. Such rules, inter-alia, provides that any LLP, whose turnover does not

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exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty-
five lakh rupees is not required to get its accounts audited. However, if the partners of such
limited liability partnership decide to get the accounts of such LLP audited, the accounts shall
be audited only in accordance with such rule.

Appointment of Auditor: The auditor may be appointed by the designated partners of the LLP

• At any time for the first financial year but before the end of first financial year

• At least thirty days prior to the end of each financial year (other than the first financial year),

• To fill the causal vacancy in the office of auditor,

• To fill the casual vacancy caused by removal of auditor.

The partners may appoint the auditors if the designated partners have failed to appoint them.

LLP are required to maintain books of accounts which shall contain –

• Particulars of all sums of money received and expended by the LLP and the matters in respect
of which the receipt and expenditure takes place,

• A record, of the assets and liabilities of the LLP,

• Statements of costs of goods purchased, inventories, work-in-progress, finished goods an

costs of goods sold,

• Any other particulars which the partners may decide.

The auditor should read the LLP agreement & note the following provisions.

• Nature of the business of the LLP

• Amount of capital contributed by each partner.

• Interest — in respect of additional capital contributed.

• Duration of partnership

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• Drawings allowed to the partners.

• Salaries, commission etc payable to partners

• Borrowing powers of the LLP

• Rights & duties of partners

(4 Marks)

Ans-5(c) Materiality is a crucial concept in auditing, applied by auditors throughout the audit
process, as outlined in SA 320. Financial reporting frameworks provide guidance on materiality
in the context of preparing and presenting financial statements. The key principles related to
materiality include:

Definition of Materiality: Misstatements, whether individual or in aggregate, are considered

material if they could reasonably be expected to influence the economic decisions of users
relying on the financial statements.

Judgments about Materiality: These judgments are made considering surrounding

circumstances, influenced by the size or nature of a misstatement, or a combination of both.

Consideration of Users as a Group: Matters material to users are determined by considering

the common financial information needs of users as a group. The potential effect of
misstatements on specific individual users, with varying needs, is not explicitly taken into
account.

In summary, materiality plays a pivotal role in shaping the auditor's approach to planning,
executing, and forming an opinion in the auditor's report. It ensures that the auditor focuses on
identifying and evaluating misstatements that could significantly impact the economic decisions
of users based on the financial statements. The principles outlined in SA 320 and financial
reporting frameworks guide auditors in making informed judgments about materiality.

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 (3 Marks)

Ans-5(d) Government audit has not only adopted the basic essentials of auditing as known and
practiced in the profession to suit the requirements of governmental transactions but has also
added new concepts, techniques and procedures to the audit profession.

The U.N. Handbook on Government Auditing and Developing Countries defines government
auditing in a comprehensive manner which is as follows:

Government auditing 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 actions

• By the responsible officials

• And in the case of examination of financial statements, expressing the appropriate

professional opinion regarding the fairness of the presentation.

OBJECTIVES:-

(a) Accounting for Public Funds:-Government audit serves as a mechanism or process for public
accounting of government funds.

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(b) Appraisal of Government 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.

(c) Base for 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.

(3 Marks)

Ans-6(a) 1. Qualification of Auditors - Section 72 of the Multi-State Co-operative Societies Act,

2002 states that a person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 can only be appointed as auditor of Multi-State co-operative society.

However the following persons are not eligible for appointment as auditors of a Multi- State co-
operative society-

(a) A body corporate.

(b) An officer or employee of the Multi-State co-operative society.

(c) A person who is a member or who is in the employment, of an officer or employee of the
Multi-State co-operative society.

(d) A person who is indebted to the Multi-State co-operative society or who has given any
guarantee or provided any security in connection with the indebtedness of any third person to
the Multi-State co-operative society for an amount exceeding one thousand rupees.

If an auditor becomes subject, after his appointment, to any, of the disqualifications specified
above, he shall be deemed to have vacated his office as such.

2. Appointment of Auditors - Section 70 of the Multi-State Co-operative Societies Act, 2002

provides that the first auditor or auditors of a Multi-State cooperative society shall be

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appointed by the board within one month of the date of registration of such society and the
auditor or auditors so appointed shall hold office until the conclusion of the first annual general
meeting. If the board fails to exercise its powers under this sub-section, the Multi-State co-
operative society in the general meeting may appoint the first auditor or auditors.

The subsequent auditor or auditors are appointed by Multi-State co-operative society, at each
annual general meeting. The auditor or auditors so appointed shall hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting.

(4 Marks)

OR

Ans-6(a) Opinion Paragraph of Audit Report: In the instant case, M/s Hary Ltd. acquired 55%
shares in M/s Sam Ltd. and the company did not prepare the consolidated financial statements
because on the date of acquisition the fair value of certain assets and liabilities has not been
ascertained. Therefore, accounting is done on estimate basis only which is not correct as the
financial statements are materially misstated due to non-consolidation of subsidiary. The
material misstatement is deemed to be pervasive to the consolidated financial statements.
Thus, the auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidences, concludes that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements.

Adverse Opinion

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, 2019,

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of its consolidated profit/loss, (consolidated position of changes in equity) and the consolidated
cash flows for the year then ended.

Basis for Adverse Opinion is given below:

As explained in Note X, the M/s Hary Ltd. has not consolidated subsidiary M/s Sam Ltd. that the
M/s Hary Ltd acquired during 2018 because it has not yet been able to determine the fair
values of certain of the subsidiary’s material assets and liabilities at the acquisition date. This
investment is therefore accounted for on an estimate basis. Under the accounting principles
generally accepted in India, the Group should have consolidated this subsidiary and accounted
for the acquisition based on provisional amounts. Had M/s Sam Ltd. been consolidated, many
elements in the accompanying consolidated financial statements would have been materially
affected. The effects on the consolidated financial statements of the failure to consolidate have
not been determined.

(4 Marks)

Ans-6(b) One of the key principles of accrual basis of accounting requires that an asset’s cost is
proportionally expensed based on the period over which the asset is expected to be used. Both
depreciation and amortization are methods that are used to prorate the cost of a specific type
of asset over its useful life. Depreciation represents systematic allocation of the depreciable
value of an item of PPE over its useful life while amortisation represents systematic allocation
of the depreciable amount of an intangible asset over its useful life.

Depreciation and amortisation generally constitute an entity’s significant part of overall

expenses and have direct impact on the profit/ loss of the entity, hence auditors need to verify
and ensure that such expenditure is appropriate, accurately calculated and has been accounted
as per applicable provisions of Companies Act or other statutes, to the extent applicable on the
respective industry and as per generally accepted accounting principles.

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Auditor needs to consider the following attributes while verifying for depreciation and
amortisation expenses:

• Obtain the understanding of entity’s accounting policy related to depreciation and

amortisation.

• Ensure the Company policy for charging depreciation and amortisation is as per the relevant
provisions of Companies Act/ applicable accounting standards.

• The accounting policy has been applied consistently year on year. Any change in the
accounting policy has been adequately disclosed.

• Whether the depreciation has been calculated after making adjustment of residual value from
the cost of the assets.

• Whether depreciation and amortisation charges are valid.

• Whether depreciation and amortisation charges are accurately calculated and recorded.

• Whether all depreciation and amortisation charges are recorded in the appropriate period.

• Whether each part of an item of PPE with a cost that is significant in relation to the total cost
of the item have been depreciated separately.

Example: It may be appropriate to depreciate separately the airframe and engines of an

aircraft, whether owned or subject to a finance lease.

• Whether the most appropriate depreciation method for each separately depreciable
component has been used.

By conducting a thorough examination based on the above considerations, the audit team aims
to provide reasonable assurance regarding the accuracy, appropriateness, and compliance of
XYZ Corporation's depreciation and amortization practices. The results of this audit will be
communicated transparently in the final audit report.

(4 Marks)

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Ans-6(c)There are different types of banking institutions prevailing in India which are as
follows: Commercial Banks Regional Rural Banks Co-operative Banks, Payment Banks,
Development Banks (more commonly known as ‘Term-Lending Institutions’), Small Finance
Banks.

1. Commercial banks are the most wide spread banking institutions in India, that provide a
number of products and services to general public and other segments of economy. Two of its
main functions are:-

(a) accepting deposits and

(b) granting advances.

2. Regional Rural Banks known as RRBs are the banks that have been set up in rural areas in
different states of the country to cater to the basic banking and financial needs of the rural
communities. Examples are:- Punjab Gramin Bank , Tripura Gramin Bank , Allahabad UP Gramin
Bank , Andhra Pradesh Grameen Vikas Bank, etc.

3. Co-operative Banks function like Commercial Banks only but are set up on the basis of
Cooperative Principles and registered under the Cooperative Societies Act of the respective
state or the Multistate Cooperative Societies Act and usually cater to the needs of the
agricultural and rural sectors. Examples are :- The Gujarat State Co-operative Bank Ltd.,
Chhatisgarh Rajya Sahakari Bank Maryadit, etc.

(3 Marks)

Ans-6(d) The design of a substantive analytical procedure is limited only by the availability of
reliable data and the experience and creativity of the audit team.

Substantive analytical procedures generally take one of the following forms:

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1. Trend Analysis: A commonly used technique 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.

2. Ratio Analysis: Ratio analysis is useful for analyzing 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.

Financial ratios may include:

Trade receivables or inventory turnover

Freight expense as a percentage of sales revenue

3. Structural modeling: A modeling tool constructs a statistical model from financial and/or
non-financial data of prior accounting periods to predict current account balances (e.g., linear
regression).

4. 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.

(3 Marks)

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