CA Final QB

INDEX
CHAPTER 1 - QUALITY CONTROL 1.1 to 1.24

CHAPTER 2 - GENERAL AUDITING PRINCIPLES AND AUDITOR’S 2.1 to 2.30
RESPONSIBILITIES
CHAPTER 3 - AUDIT PLANNING, STRATEGY & EXECUTION 3.1 to 3.56
CHAPTER 4 - MATERIALITY, RISK ASSESSMENT AND INTERNAL 4.1 to 4.56
CONTROL
CHAPTER 5 - AUDIT EVIDENCE 5.1 to 5.68
CHAPTER 6 - COMPLETION AND REVIEW 6.1 to 6.36
CHAPTER 7 - REPORTING 7.1 to 7.116
CHAPTER 8 - SPECIALISED AREAS 8.1 to 8.14
CHAPTER 9 - RELATED SERVICES 9.1 to 9.12
CHAPTER 10 - REVIEW OF FINANCIAL INFORMATION 10.1 to 10.10
CHAPTER 11 - PROSPECTIVE FINANCIAL INFORMATION AND 11.1 to 11.10
OTHER ASSURANCE SERVICES
CHAPTER 12 - DIGITAL AUDITING AND ASSURANCE 12.1 to 12.26
CHAPTER 13 - GROUP AUDITS 13.1 to 13.40
CHAPTER 14 - SPECIAL FEATURES OF AUDIT OF BANKS & NON- 14.1 to 14.78
BANKING FINANCIAL COMPANIES
CHAPTER 15 - AUDIT OF PUBLIC SECTOR UNDERTAKINGS 15.1 to 15.34
CHAPTER 16 - INTERNAL AUDIT 16.1 to 16.34
CHAPTER 17 - DUE DILIGENCE, INVESTIGATION AND FORENSIC 17.1 to 17.62
AUDIT
CHAPTER 18 - SUSTAINABLE DEVELOPMENT 18.1 to 18.18
CA Harshad Jaju
Swapnil Patni Classes caharshad
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CHAPTER
1 QUALITY CONTROL
SQC 1 – Quality Control for Firm

Question 1
J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon
Ltd. after ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr. Jay
was the engagement partner for the aforesaid audit and prior to commencement of the audit,
Mr. Jay had called for a meeting of the engagement team in order to direct them and assign
them their responsibilities. At the end of meeting, Mr. Jay assigned review responsibilities to two
of the engagement team members who were the most experienced amongst all, for reviewing the
work performed by the less experienced team members. While reviewing the work performed
by the less experienced members of the engagement team, what shall be the considerations of
the reviewers? (MTP 5 Marks, March 21)
Answer 1
As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, review responsibilities are
determined on the basis that more experienced team members, including the engagement partner,
review work performed by less experienced team members.
In the given situation, Mr. Jay, engagement partner assigned review responsibilities to two of the
engagement team members who were the most experienced team members.
While reviewing the work performed by less experienced members of the engagement team, both the
more experienced Reviewers should consider whether:
(i) The work has been performed in accordance with professional standards and regulatory and legal
requirements.
(ii) Significant matters have been raised for further consideration.
(iii) Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented.
(iv) There is a need to revise the nature, timing and extent of work performed.
(v) The work performed supports the conclusions reached and is appropriately documented.
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.
CA Harshad Jaju
Swapnil Patni Classes caharshad 1.1
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QUALITY CONTROL QUALITY CONTROL
Question 2 Question 3
M/s Chandra & Co., Chartered Accountants were appointed as Statutory Auditors of Green (Includes concepts of SA 220-Quality Control for an Audit of Financial Statements) CA Ragini
Essence Limited for the F.Y 2021-2022. The previous year’s audit was conducted by M/s. Nath is offered an appointment to act as Engagement Quality Control Reviewer (EQCR) for the audit
& Associates. After the audit was completed and report submitted, it was found that closing of the financial year 2022-23 of XPM Limited, a listed company operating from a small town.
balances of last financial year i.e., 2020-21 were incorrectly brought forward. It was found She is also based in the same town and was not engaged previously to conduct an audit of a listed
that M/s Chandra & Co. did not apply any audit procedures to ensure that correct opening entity. She accepts the appointment to act as ECQR. She performs the review by ticking a Yes/
balances have been brought forward to the current period. Accordingly, a complaint was filed No checklist and signing on some of the working papers prepared by the engagement team. The
against Chandra & Co. in relation to this matter. You are required to inform what policies are audit file does not contain any material misstatement which shows that the work of EQCR is
required to be implemented by Chandra & Co. for dealing with such complaints and allegations separate from the work of the engagement team. Do you agree with the approach adopted by
as required by Standard on Quality Control (SQC). (MTP 5 Marks March 22, PYP 5 Marks EQCR? Comment. (MTP 5 Marks Sep ‘23)
Jan’21) Answer 3
Answer 2 As per SQC 1 engagement quality control reviewer can be a partner, other person in the firm (member
In the given question, Chandra & Co. did not apply audit procedures to ensure that opening balances of ICAI), suitably qualified external person, or a team made up of such individuals, with sufficient and
had been correctly brought forward. A complaint was filed against the auditors in this context. As per appropriate experience and authority to objectively evaluate, before the report is issued, the significant
Standard on Quality Control (SQC) 1 “Quality Control for Firms that Perform Audits and Reviews of judgments the engagement team made and the conclusions they reached in formulating the report.
Historical Financial Information, and Other Assurance and Related Services Engagements”, It also states that the engagement quality control reviewer for an audit of the financial statements of a
(i) The firm should establish policies and procedures designed to provide it with reasonable assurance listed entity is an individual with sufficient and appropriate experience and authority to act as an audit
that it deals appropriately with: engagement partner on audits of financial statements of listed entities.
(a) Complaints and allegations that the work performed by the firm fails to comply with professional In addition, the work of EQCR involves objective evaluation of the significant judgments made by the
standards and regulatory and legal requirements; and engagement team and ensuring that the conclusions reached by the team in formulating audit report
(b) Allegations of non-compliance with the firm’s system of quality control. are appropriate. It is necessary for EQCR to have the requisite technical expertise and experience to
enable her to perform the assigned role of evaluating the work of engagement team so that any possible
(ii) Complaints and allegations (which do not include those that are clearly frivolous) may originate
misstatement can be avoided. Without ensuring the appropriate technical expertise and experience, the
from within or outside the firm. They may be made by firm personnel, clients or other third parties.
whole purpose of EQCR is defeated. Therefore, it was not appropriate for her to accept appointment
They may be received by engagement team members or other firm personnel. as ECQR for listed entity.
(iii) As part of this process, the firm establishes clearly defined channels for firm personnel to raise Further, SA 220 states that the engagement quality control reviewer shall document, for the audit
any concerns in a manner that enables them to come forward without fear of reprisals. engagement reviewed, that the procedures required by the firm’s policies on engagement quality
(iv) The firm investigates such complaints and allegations in accordance with established policies and control review have been performed. It also states that it shall also be documented that the reviewer
procedures. The investigation is supervised by a partner with sufficient and appropriate experience is not aware of any unresolved matters that would cause the reviewer to believe that the significant
and authority within the firm but who is not otherwise involved in the engagement, and includes judgments the engagement team made and the conclusions they reached were not appropriate.
involving legal counsel as necessary. Small firms and sole practitioners may use the services of In the given situation, CA Ragini is offered an appointment to act as Engagement Quality Control
a suitably qualified external person or another firm to carry out the investigation. Complaints, Reviewer (EQCR) for the audit of the financial year 2022-23 of XPM Limited, a listed company
allegations and the responses to them are documented. operating from a small town. She has accepted the appointment and performed the review by ticking
(v) Where the results of the investigations indicate deficiencies in the design or operation of the firm’s a Yes / No checklist and signing on some of the working papers prepared by the engagement team.
quality control policies and procedures, or non-compliance with the firm’s system of quality In the instant case, there are no working papers to show that evaluation has been done by EQCR on
control by an individual or individuals, the firm takes appropriate action. conclusions reached by engagement team. Mere ticking of a Yes/No checklist and signing on some working
papers of engagement team shows that no such evaluation and review of work performed by engagement
team has been made by EQCR. Therefore, her approach was not proper in performing work of EQCR.
CA Harshad Jaju CA Harshad Jaju

1.2 Swapnil Patni Classes caharshad Swapnil Patni Classes caharshad 1.3
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Question 4 standards and the internal control environment.

BSS & Associates is a partnership firm of Chartered Accountants which was established five • Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
years back. The firm was offering only advisory services at the beginning, however, after audit
rotation and advent of GST, firm sees lot of potential in these areas also and started looking for • Indications of an inappropriate limitation in the scope of work.
opportunities in these areas also. These services being assurance in nature, the firm required • Indications that the client might be involved in money laundering or other criminal activities.
some internal restructuring and set up some policies and procedures for compliance year on • The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.
year.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within
The firm started getting new clients for these new services and is now looking to obtain such the context of an ongoing relationship with that client.
information as it considers necessary in the circumstances before accepting an engagement with
a new client, when deciding whether to continue an existing engagement, and when considering
acceptance of a new engagement with an existing client. Where issues have been identified, and EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: Matters to be
the firm decides to accept or continue the client relationship or a specific engagement, it has considered with regard to integrity of a client: Only few Examinees have given correct answers
been setting up a process to document how the issues were resolved. while most of the Examinees wrongly mentioned about KYC and background of clients.
The firm is now looking to work with only select clients which are in line with the policies of the
firm. The firm understands that the extent of knowledge it will have regarding the integrity of Question 5
a client will grow within the context of an ongoing relationship with that client. With regard to HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the last
the integrity of a client, you are required to give some examples of the matters to be considered 8 financial years. CA. H, partner of the firm, has been handling the audit assignment very
by the firm as per the requirements of SQC 1. (RTP May 19, PYP 4 Marks, Nov-19, Old SM) well since the appointment. The audit work of CA. H and her team is reviewed by a senior
OR partner CA. K to assure that audit is performed in accordance with professional standards and
regulatory and legal requirements. CA. K was out of India for some personal reasons, so this
MB & Associates is a partnership firm of Chartered Accountants which was established seven
year CA. G has been asked to review the audit work. In your opinion, what areas CA. G should
years back. The firm is getting new clients and has also, been offered new engagement services
consider at the time of review. List any four areas and also comment whether firm is complying
with existing clients. The firm is concerned about obtaining such information as it considers
with Standard on Quality Control or not. (PYP 5 Marks July 21)
necessary in the circumstances before accepting an engagement with a new client and acceptance
of a new engagement with an existing client. The firm is looking to work with only select clients Answer 5
to adhere to the Quality Control Standards. Guide MB & Associates about the matters to be Compliance with Standard on Quality Control on review of audit work -
considered with regard to the integrity of a client, as per the requirements of SQC 1. (New SM)
As per SQC 1, an engagement quality control review for audits of financial statements of listed entities
Answer 4 includes considering the following:
The firm should obtain such information as it considers necessary in the circumstances before accepting (i) The work has been performed in accordance with professional standards and regulatory and
an engagement with a new client, when deciding whether to continue an existing engagement, and legal requirements;
when considering acceptance of a new engagement with an existing client. Where issues have been
(ii) Significant matters have been raised for further consideration;
identified, and the firm decides to accept or continue the client relationship or a specific engagement,
it should document how the issues were resolved. (iii) Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented;
With regard to the integrity of a client, matters that the firm considers include, for example:
(iv) There is a need to revise the nature, timing and extent of work performed;
• The identity and business reputation of the client’s principal owners, key management, related
parties and those charged with its governance. (v) The work performed supports the conclusions reached and is appropriately documented;
• The nature of the client’s operations, including its business practices. (vi) The evidence obtained is sufficient and appropriate to support the report; and
• Information concerning the attitude of the client’s principal owners, key management and those (vii) The objectives of the engagement procedures have been achieved.
charged with its governance towards such matters as aggressive interpretation of accounting
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The firm should establish policies and procedures: 4. Whether appropriate consultation has taken place on matters involving differences of opinion or
(i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat to an other difficult or contentious matters, and the conclusions arising from those consultations.
acceptable level when using the same senior personnel on an assurance engagement over a long 5. The significance and disposition of corrected and uncorrected misstatements identified during the
period of time; and engagement.
(ii) For all audits of financial statements of listed entities, requiring the rotation of the engagement 6. The matters to be communicated to management and those charged with governance and, where
partner after a specified period in compliance with the Code. applicable, other parties such as regulatory bodies.
The familiarity threat is particularly relevant in the context of financial statement audits of listed 7. Whether working papers selected for review reflect the work performed in relation to the significant
entities. judgments and support the conclusions reached.
For these audits, the engagement partner should be rotated after a predefined period, normally not 8. The appropriateness of the report to be issued.
more than seven years. Engagement quality control reviews for engagements other than audits of financial statements of
From the facts given in the question and from the above stated paras of SQC 1, it can be concluded listed entities may, depending on the circumstances, include some or all of these considerations.
that firm is not complying with SQC 1 as Engagement Partner H is continuing for more than 7 years.
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: Question 7
Most of the examinees did not highlight regarding the rotation of the engagement partner for a AP & Associates, Chartered Accountants, are Statutory Auditors of XP Limited for the last
maximum period of seven years and hence the firm is not complying with SQC 1. four years. XP Limited is engaged in the manufacture and marketing of FMCG Goods in India.
During 2021-22, the Company has diversified and commenced providing software solutions in
Question 6 the area of “e-commerce” in India as well as in certain European countries. AP & Associates,
PQR & Associates, Chartered Accountants, is a partnership firm having 3 partners CA P, CA while carrying out the audit for the current financial year, came to know that the company has
Q and CA R. PQR & Associates are appointed as Statutory Auditors of ABC Limited, a listed expanded its operations into a new segment as well as new geography. AP & Associates does not
entity for the financial year 2021-22 and CA P is appointed as Engagement Partner for the audit possess necessary expertise and infrastructure to carry out the audit of this diversified business
of ABC Limited. activities and accordingly wishes to withdraw from the engagement and client relationship.
Discuss the issues that need to be addressed before deciding to withdraw. (PYP 5 Marks Nov 22)
Before issuing the Audit Report of ABC Limited, CA P asked CA R to perform Engagement
Quality Control Review and is of the view that his responsibility will be reduced after review Answer 7
by CA R. Whether the contention of CA P is correct? What are the aspects that need to be Acceptance and Continuance of Client Relationships and Specific Engagements: As per SQC 1,
considered by CA R while performing Engagement Quality Control Review for audit of financial “Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and
statements of ABC Limited? (PYP 5 Marks May ‘22) other Assurance and Related Services Engagements”, the firm should establish policies and procedures
Answer 6 for the acceptance and continuance of client relationships and specific engagements, designed to
provide it with reasonable assurance that it will undertake or continue relationships and engagements
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical Financial
only where it is competent to perform the engagement and has the capabilities, time and resources to
Information, and other Assurance and Related Services Engagements”, the review does not reduce the
do so.
responsibilities of the engagement partner. Hence, contention of CA. P that after engagement quality
control review by CA. R, his responsibility will be reduced, is not correct. In the given case, AP & Associates, Chartered Accountants, statutory auditors of XP Limited for the
last four years, came to know that the company has expanded its operations into a new segment as well
However, CA. R needs to consider the following aspect while performing Engagement Quality Control
as new geography. AP & Associates does not possess necessary expertise for the same, therefore, AP
Review for audit of financial statements of a listed entity ABC Ltd.:
& Associates wish to withdraw from the engagement and client relationship. Policies and procedures
1. The engagement team’s evaluation of the firm’s independence in relation to the specific engagement. on withdrawal from an engagement or from both the engagement and the client relationship address
2. Significant risks identified during the engagement and the responses to those risks. issues that include the following:
3. Judgments made, particularly with respect to materiality and significant risks.

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• Discussing with the appropriate level of the client’s management and those charged with its governance SA 220 – Quality Control
regarding the appropriate action that the firm might take based on the relevant facts and circumstances.
Question 1
• If the firm determines that it is appropriate to withdraw, discussing with the appropriate level of
OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started
the client’s management and those charged with its governance withdrawal from the engagement
its operations 5 years back. The field work during the audit of the financial statements of the
or from both the engagement and the client relationship, and the reasons for the withdrawal.
company for the year ended 31 March 2018 got completed on 1 May 2018. The auditor’s report
• Considering whether there is a professional, regulatory or legal requirement for the firm to remain was dated 12 May 2018. During the documentation review of the engagement, it was observed
in place, or for the firm to report the withdrawal from the engagement, or from both the engagement that the engagement quality control review was completed on 15 May 2018. Engagement partner
and the client relationship, together with the reasons for the withdrawal, to regulatory authorities. had completed his reviews in entirety by 10 May 2018. Please comment. (MTP 5 Marks, Mar 19
• Documenting significant issues, consultations, conclusions and the basis for the conclusions. & Oct 18)
AP & Associates should address the above issues before deciding to withdraw. Answer 1
Review by Engagement Partner: As per SA 220, “Quality Control for an Audit of Financial Statements”,
the engagement partner shall take responsibility for reviews being performed in accordance with
Question 8
the firm’s review policies and procedures. For audits of financial statements of listed entities, the
JJJ & Associates, an audit firm working mainly in field of statutory audits, has been selected by Quality engagement partner shall:
Review Board (QRB) for review. During review, it has been found that Audit Firm Under Review
• Determine that an engagement quality control reviewer has been appointed;
(AFUR) has not maintained quality of audits of selected companies as evidenced from their respective
audit files. AFUR has not complied with requirements of SA 501 and SA 505 in these cases. Further, in • Discuss significant matters arising during the audit engagement, including those identified during
these cases, companies had not complied with accounting standards as required by law and AFUR has the engagement quality control review, with the engagement quality control reviewer; and
issued clean audit reports. Dwell upon functions of QRB in this regard. (MTP 5 Marks Oct ‘23) • Not date the auditor’s report until the completion of the engagement quality control review.
Answer 8 SA 700, “Forming an Opinion and Reporting on Financial Statements”, requires the auditor’s report
Central Government has constituted a Quality Review Board as an independent body under to be dated no earlier than the date on which the auditor has obtained sufficient appropriate evidence
the Chartered Accountants Act, 1949 to review the quality of services provided by the Chartered on which to base the auditor’s opinion on the financial statements. In cases of an audit of financial
Accountants in India including audit services. statements of listed entities where the engagement meets the criteria for an engagement quality control
review, such a review assists the auditor in determining whether sufficient appropriate evidence has
Accordingly, u/s 28B of the Chartered Accountants Act, 1949, the Board shall perform the following
been obtained.
functions, namely: -
Conducting the engagement quality control review in a timely manner at appropriate stages during
(a) to make recommendations to the Council with regard to the quality of services provided by the
the engagement allows significant matters to be promptly resolved to the engagement quality control
members of the Institute
reviewer’s satisfaction on or before the date of the auditor’s report.
(b) to review the quality of services provided by the members of the Institute including audit services
In the instant case, OP & Associates are the statutory auditors of a listed company BB Ltd. Which
(c) to guide the members of the Institute to improve the quality of services and adherence to the started its operations 5 years back. The field work during the audit of the financial statements of the
various statutory and other regulatory requirements and company for the year ended March 31, 2018 got completed on May 1, 2018. The auditor’s report was
(d) to forward cases of non-compliance with various statutory and regulatory requirements by the dated May 12, 2018. During the documentation review of the engagement, i t was observed that the
members of the Institute or firms, noticed by it during the course of its reviews, to the Disciplinary engagement quality control review was completed on May 15, 2018.
Directorate for its examination. Thus, in the given case, signing of auditor’s report i.e., on May 12, 2018 which is before the completion
In the given situation, AUFR has not performed audits of selected companies qualitatively and of review engagement quality control review i.e., May 15, 2018, is not in order.
has failed to perform audits in accordance with Standards on Auditing, Further, it has issued clean
reports despite non-adherence to accounting standards by respective companies. Therefore, QRB is
empowered to act on the lines mentioned above in respect of AUFR.
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Question 2 Co., therefore, signed the accounts of PK Ltd., without reviewing the work performed by CA.
During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his Kumar. Advise, whether CA. Rishi is right in expressing an opinion on financial statements the
reviews and also ensured compliance with independence requirements that apply to the audit audit of which is performed by another auditor. (5 Marks, April 18)
engagement. The engagement files were also reviewed by the Engagement Quality Control Answer 3
Reviewer (EQCR) except the independence assessment documentation. Engagement Partner Relying on Work Performed by Another Auditor: As per SA 220 “Quality Control for an Audit of
was of the view that matters related to independence assessment are the responsibility of the Financial Statements”, an engagement partner taking over an audit during the engagement may apply
Engagement Partner and not Engagement Quality Control Reviewer. Engagement Quality the review procedures such as the work has been performed in accordance with professional standards
Control Reviewer objected to this and refused to sign off the documentation. Please advise as and regulatory and legal requirements; significant matters have been raised for further consideration;
per SA 220 (MTP 4 Marks, Oct 19, RTP May’22 & RTP May’19, Old & New SM) appropriate consultations have taken place and the resulting conclusions have been documented and
Answer 2 implemented; there is a need to revise the nature, timing and extent of work performed; the work
As per SA 220, Engagement Partner shall form a conclusion on compliance with independence performed supports the conclusions reached and is appropriately documented; the evidence obtained
requirements that apply to the audit engagement. In doing so, Engagement Partner shall: is sufficient and appropriate to support the auditor’s report; and the objectives of the engagement
procedures have been achieved.
a) Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence; Further, one of the basic principles, which govern the auditor’s professional responsibilities and
which should be complied with wherever an audit is carried, is that when the auditor delegates work
b) Evaluate information on identified breaches, if any, of the firm’s independence policies and
to assistants or uses work performed by other auditor and experts, he will continue to be responsible
procedures to determine whether they create a threat to independence for the audit engagement;
for forming and expressing his opinion on the financial information. However, he will be entitled to
and
rely on work performed by others, provided he exercises adequate skill and care and is not aware of
c) Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying any reason to believe that he should not have so relied. This is the fundamental principle which is
safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal ethically required as per Code of Ethics.
is permitted by law or regulation. The engagement partner shall promptly report to the firm any
However, the auditor should carefully direct, supervise and review work delegated. He should obtain
inability to resolve the matter for appropriate action.
reasonable assurance that work performed by other auditors/experts and assistants is adequate for his
Engagement Partner shall take responsibility for reviews being performed in accordance with the purpose.
firm’s review policies and procedures.
In the given case, all the auditing procedures before the moment of signing of final report have been
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial statements performed by CA. Kumar. However, the report could not be signed by him due to his unfortunate
of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an engagement death.
quality control review, shall also consider the engagement team’s evaluation of the firm’s independence
Later on, CA. Rishi signed the report relying on the work performed by CA. Kumar. Here, CA. Rishi
in relation to the audit engagement.
is allowed to sign the audit report, though, will be responsible for expressing the opinion. He may rely
In the given case, Engagement Partner is not right. The independence assessment documentation on the work performed by CA. Kumar provided he further exercises adequate skill and due care and
should also be given to Engagement Quality Control Reviewer for his review. review the work performed by him as required in compliance with SA 220.
Rishi Kumar & Co. has been appointed as an auditor of PK Ltd. for the financial year 2016 -17. (Includes concepts of SQC 1)
CA. Kumar, one of the partners of M/s Rishi Kumar & Co., completed entire routine audit work
NEMI Limited (manufacturer of textile goods) got an order of manufacturing of PPE kits in
by 29th May, 2017.
December 2021. But there was shortage of machinery and manpower to accomplish the ordered
Unfortunately, on the very next morning, while roving towards office of PK Ltd. to sign final audit requirement of PPE kits. NEMI Limited approached another manufacturing unit Rathnemi
report, he met with a road accident and died. CA. Rishi, another partner of M/s Rishi Kumar & Limited for purchase of the unit. Rathnemi Limited was interested in the sale of unit, so the deal

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went through, and NEMI Limited acquired ninety five percent shares of Rathnemi Limited. The MULTIPLE CHOICE QUESTIONS (MCQS)
new management of Rathnemi Limited proposed and appointed Mani Associates, Chartered
Question 1
Accountants, (already auditors of NEMI Limited) as new auditors of Rathnemi Limited. Mani
Associates accepted the assignment without considering information whether the conclusions VKPL & Associates, a firm of Chartered Accountants, have been operating for the last 5 years
reached regarding the acceptance and continuance of client relationships and audit engagements having its office in Gurgaon. The firm has staff of around 25 persons with 3 Partners.
are appropriate. Comment with respect to appropriate Standard on Auditing what type of The firm has been offering statutory audit, risk advisory and tax services to its various clients.
information assists the engagements partner in determining whether the conclusions reached The major work of the firm is for taxation services. The audit partners also discussed that the
regarding the acceptance and continuance of client relationships and audit engagements are firm needs to work significantly to improve the quality of the services they offer and that would
appropriate or not? (MTP 5 Marks Sep 22) also help the firm to grown its business. Considering this objective, the firm started training
Answer 4 programmes for the staff which were made mandatory to be attended.
Acceptance and Continuance of Client Relationships and Audit Engagements : As per SA 220, “Quality During one of the training programmes on quality, a topic was discussed regarding the information
Control for an Audit of Financial Statements” , SQC 1, “Quality Control for Firms that Perform that should be obtained by the firm before accepting an engagement with a new client, when
Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services deciding whether to continue an existing engagement, and when considering acceptance of a
Engagements”, requires the firm to obtain information considered necessary in the circumstances new engagement with an existing client. It was explained that the following points may assist the
before accepting an engagement with a new client, when deciding whether to continue an existing engagement partner in determining whether the conclusions reached regarding the acceptance
engagement, and when considering acceptance of a new engagement with an existing client. and continuance of client relationships and audit engagements are appropriate (as per SA 220):
Information such as the following assists the engagement partner in determining whether the (i) The integrity of the principal owners, key management and those charged with governance
conclusions reached regarding the acceptance and continuance of client relationships and audit of the entity;
engagements are appropriate: (ii) The qualification of all the employees of the entity;
(i) The integrity of the principal owners, key management and those charged with governance of the (iii) Whether the engagement team is competent to perform the audit engagement and has the
entity. necessary capabilities, including time and resources;
(ii) Whether the engagement team is competent to perform the audit engagement and has the necessary (iv) The remuneration offered by the entity to its various consultants;
capabilities, including time and resources.
(v) Whether the firm and the engagement team can comply with relevant ethical requirements;
(iii) Whether the firm and the engagement team can comply with relevant ethical requirements; and and
(iv)Significant matters that have arisen during the current or previous audit engagement, and their (vi) Significant matters that have arisen during the current or previous audit engagement, and
implications for continuing the relationship. their implications for continuing the relationship.
We would like to understand from you which of the above mentioned points are relevant for the
topic under discussion or not?
(a) i, ii, iv and v.
(b) ii, iv, v and vi.
(c) iii, iv, v and vi.
(d) i, iii, v and vi. (RTP Nov 19)
Ans : (d)

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Question 1 Answer 4
PQR & Associates are statutory auditors of a listed company. There arose an issue during the In case, recommendations of engagement quality control reviewer are not accepted by engagement
course of audit relating to related party transactions. The engagement partner wants to consult partner and matter is not resolved to reviewer’s satisfaction, the matter should be resolved by following
engagement quality control reviewer on this matter during the course of audit process itself. established procedures of firm like by consulting with another practitioner or firm, or a professional
Can he consult with engagement quality control reviewer? Discuss. or regulatory body.
Answer 1 The audit report should be issued only after resolution of matter.
It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or making
decisions for engagement team is to be avoided at all costs. However, engagement partner may consult
Question 5
engagement quality control reviewer during the engagement so as not to compromise his objectivity
and eligibility to perform the role. MB & Associates is a partnership firm of Chartered Accountants which was established seven
years back. The firm is getting new clients and has also, been offered new engagement services
with existing clients. The firm is concerned about obtaining such information as it considers
Question 2 necessary in the circumstances before accepting an engagement with a new client and acceptance
Beta Private Limited has approached a firm of Chartered accountants to assist them in of a new engagement with an existing client. The firm is looking to work with only select clients
preparation of financial statements and issue a compilation report in this regard. Does CA to adhere to the Quality Control Standards. Guide MB & Associates about the matters to be
firm have responsibility in relation to quality control for above said engagement? Discuss with considered with regard to the integrity of a client, as per the requirements of SQC 1.
reasons. Answer 5
Answer 2 As per SQC 1, the firm should obtain such information as it considers necessary in the circumstances
Such kind of services fall in category of “related services”. SQC 1 is applicable to all type of before accepting an engagement with a new client, when deciding whether to continue an existing
engagements including engagement pertaining to “related services”. engagement, and when considering acceptance of a new engagement with an existing client. Where
issues have been identified, and the firm decides to accept or continue the client relationship or a
specific engagement, it should document how the issues were resolved.
Question 3 With regard to the integrity of a client, matters that the firm considers include, for example:
Ramanujan, a CA final student, feels that engagement file in audit engagement should be ready (i) The identity and business reputation of the client’s principal owners, key management, related
prior to issue of audit report. Discuss whether Ramanujan’s view is in order. parties and those charged with its governance.
Answer 3 (ii) The nature of the client’s operations, including its business practices.
The firm should establish policies and procedures for engagement teams to complete the assembly of (iii) Information concerning the attitude of the client’s principal owners, key management and those
final engagement files on a timely basis after the engagement reports have been finalized. Engagement charged with its governance towards such matters as aggressive interpretation of accounting standards
files should be completed in not more than 60 days after date of auditor’s report in case of audit and the internal control environment.
engagements. Thus, view of Ramanujam is not in order.
(iv) Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
(v) Indications of an inappropriate limitation in the scope of work.
Question 4
(vi) Indications that the client might be involved in money laundering or other criminal activities.
BNE & Co. are in midst of audit process of a listed company. During the course of audit, an issue
(vii) The reasons for the proposed appointment of the firm and non-reappointment of the previous
arose relating to revenues from contracts with customers in terms of Ind AS 115. The engagement
firm.
partner took a certain stand. However, engagement quality control reviewer recommended
otherwise after review. The engagement partner is not willing to accept recommendations of The extent of knowledge a firm will have regarding the integrity of a client will generally grow within
reviewer. How can the stalemate be ended? the context of an ongoing relationship with that client.

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Question 6 2. The firm’s policies and procedures in relation to its personnel are designed to demonstrate its
ABC & Associates, Chartered Accountants has a policy to accept the clients wherein the overriding commitment to quality.
risk evaluation is conducted with respect to the Company and the promoter. XYZ Limited 3. The firm devotes sufficient resources for development and documentation of its quality control
approached ABC & Associates. policies and procedures
Promoter of XYZ Limited is a close associate and family friend of Mr. A, Managing Partner 4. A firm before accepting an engagement should acquire vital information about the client. Such an
of ABC & Associates. XYZ Limited is in news in the previous year for certain inquiries from information should help firm to decide about integrity of Client, promoters and key managerial
the regulatory authorities in relation to certain matters. The existing auditor of XYZ Limited personnel, competence (including capabilities, time and resources) to perform engagement and
has resigned and has created a casual vacancy. XYZ Limited is ready to offer 25% more than compliance with ethical requirements.
the existing fees and has approached ABC & Associates for appointment as Auditor. Mr. A has
strong recommendation to the Firm to accept the audit.
Question 7
What is your understanding of the functioning of the tone at the top of the Firm ABC &
Associates, Chartered Accountants.? What are the considerations one should exercise to uphold MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a borrower.
Quality of the Firm? It deputes one of its paid Chartered accountant employees, Sudhanshu, to conduct above said
stock audit. He leverages it as an opportunity to prevail upon the client to get the accounts
Answer 6
audited from their firm. He also assures the client of a clean stock audit report without adverse
The given situation indicates that proposed client is a new one whose promoter is close associate and comments as a quid pro quo. Is approach of Sudhanshu proper? How does it reflect upon quality
family friend of managing partner of M/s ABC & Associates. However, previous auditor of proposed control system of firm?
client has resigned and company is offering hike in audit fees in comparison to audit fees paid to
Answer 7
previous auditor.
Approach of Sudhanshu is not proper. Such practices blatantly violate code of ethics and its spirit. It
Besides, there are also regulatory inquires against the company. In spite of all this, managing partner
reflects poorly upon quality control system of firm envisaged in SQC 1 which requires that quality
of firm Mr. A has recommended for acceptance of offered audit of the company.
control policies and procedures should be documented and communicated to the firm’s personnel. It
It reflects poorly regarding functioning at top of the firm as regards to quality control. SQC 1 requires shows that firm’s personnel are not properly sensitized regarding requirements of SQC 1.
that firm should establish a system of quality control designed to provide it with reasonable assurance
that firm and its personnel comply with professional standards and legal and regulatory requirements.
It further requires that firm’s business strategy is subject to overriding requirement of firm to achieve Question 8
quality in all engagements. CA M is introduced to a prospective client in a social function. He assures to visit office of CA
However, in the given situation, commercial considerations seem to be overriding factor. M very soon in relation to professional work. During discussions over a cup of coffee next week,
it transpires that there was a search by Enforcement Directorate in his premises about a month
The managing partner of firm is close associate and family friend of promoter. The matter should
back resulting in recovery of huge sum of cash. The income tax department had also searched his
have been brought to knowledge of firm in accordance with requirements of SQC 1 as it involves
premises in relation to bogus capital gains on penny stocks. Lamenting poor quality of services
issue of independence of managing partner of the firm with respect to proposed audit engagement.
provided by his present auditor, he offers appointment as tax auditor of his five family-owned
Further, matters of inquiries from regulators and resignation of previous auditor raise question about
firms to CA M in lieu of handsome fees. What are the factors to be evaluated by CA M if he
integrity of the proposed client. SQC 1 further requires firm to consider before acceptance of an
wants to take up the engagement?
engagement that client does not lack integrity. All these factors need to be taken into consideration
before accepting engagement. Answer 8
Overall, such a situation reflects lack of proper establishment of quality control framework at top of the firm. As per SQC 1, before accepting a new engagement, integrity of client should be considered including
matters that indicate involvement in money laundering or criminal activities. There has been search
Following considerations should be taken into account while upholding quality of firm: -
of ED on the said party leading to recovery of huge amount of cash. The above coupled with actions
1. The firm assigns its management responsibilities so that commercial considerations do not override of income tax department relating to bogus capital gains on penny stocks indicates that client might
quality of work performed be involved in money laundering activities. Therefore, offer should not be accepted.
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Question 9 Audit working papers sent by him through email included procedures on how some balances in
GVN & Associates are auditors of a listed company involved in “fin-tech” sector. The financial statements were verified. Also included in working papers were procedures performed
engagement team is stuck up with some issue pertaining to a particular Ind-AS applicable to by him relating to verification of inventories, trade receivables and trade payables.
the company. They have framed a query and sent to ICAI for expert opinion on the matter. The The working papers sent by him to the authority did not include details on audit plan and
issue was resolved upon receipt of expert opinion. Since expert opinion was provided by ICAI, manner of identifying and assessing risks of material misstatement. On being asked to respond,
engagement team was of the view that appointment of engagement quality control reviewer has it was reasoned by him that audit was properly planned and required procedures were carried
lost its relevance. Do you agree? out in relation to material items on test check basis.
Answer 9 It has been further clarified by him to the authority that audit was carried out in accordance
Engagement quality control review in listed entities is a mandatory requirement. Expert opinion of with Standards and it was practically not feasible for a firm of small size to make a detailed audit
ICAI pertains to issue of interpretation. The appointment of reviewer is a separate and mandatory plan. It was also put on record with authority that he had assessed risk of material misstatement
requirement in audits of listed companies. to be low based upon his understanding of the company. He has further reasoned that assessing
risks is a matter of professional judgment. Representation has also been made by him stating
that communications as necessary were made orally with those charged with governance.
Question 10
It was also pointed out to him that engagement quality control review was not carried out. He
RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged in has answered that no contentious matter arose during the course of audit and therefore, no need
manufacturing of heavy machinery components. The audit report for year 2021-22 also included was felt to carry out this exercise.
report on matters listed in CARO,2020. While reporting under clause vii(a) of the said order
Attention was also drawn to the fact that financial statements of company were required to
relating to regularity of undisputed statutory dues by the company, the auditors have commented
be prepared on basis of Ind-AS. However, at some places in notes to accounts, reference is
that company is “generally regular” in depositing statutory dues to appropriate authorities. Is
made to accounting standards which are not applicable to the company. These errors have been
above reporting qualitative and in line with requirements of SA-220?
attributed to data feeding entry errors by junior staff.
Answer 10
Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the objectives
Based upon above, answer the following questions:
of the auditor, as per SA 220, is to implement quality control procedures at the engagement level that
provide the auditor with reasonable assurance that the audit complies with professional standards and 1) It has been contended by auditor that audit was properly planned. He has further stated that
regulatory and legal requirements. The reporting under CARO, 2020 is not proper. Hence, the audit it was practically not feasible for firm of small size to prepare a detailed audit plan? Which of
does not comply with regulatory and legal requirements. the following views is most appropriate in this regard?
a) Audit was, in fact, planned as evidenced by auditor’s submissions.
b) Although auditor has no record of audit plan, it does not affect compliance with SA 220.
Integrated case scenario
c) Since auditor has no record of audit plan, it goes on to show non-compliance with SA 220.
CA Mritunjay is statutory auditor of a listed company engaged in providing services relating
to “tourism sector”. He is practicing in sole-proprietorship capacity. The audit of abovesaid d) Audit was, in fact, planned as evidenced by auditor’s submissions. However. there is an exemption
listed company was conducted by his proprietary firm and report was issued for year 2021-22. for small CA firms doing away with cumbersome documentation in relation to audit plan.
Subsequently, audit report was selected by NFRA to oversee quality of service and compliance Ans: (c)
with Standards. Necessary information was called from auditor towards above objective.
It was required of him to produce audit working papers to show that audit was carried out in
accordance with Standards on auditing. Details of the audit plan and details of risk assessment
procedures carried out to identify and assess risk of material misstatement in financial statements
were called. It was also required to show how response to assessed risks was designed and
implemented and communicated with those charged with governance.
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2) The auditor has reasoned that risk of material misstatement has been assessed to be low based 5) On your overall reading of the case study, which of the following statements appears to be
upon his understanding of the company and it is a matter of professional judgment. Identify the true?
most appropriate statement from below in this regard. a) The firm has an effective system of quality control described in SQC 1. Audit engagement has
a) Assessing risks of material statement is a matter of professional judgment. It cannot be demanded also been performed in accordance with SA-220.
from him how his judgment was arrived at. b) The firm does not have effective system of quality control described in SQC 1. Audit engagement
b) Although auditor has not submitted record of how risk of material misstatement was arrived at, it has also not been performed in accordance with SA 220.
does not affect compliance with SA 220. c) SQC 1 is not applicable in the case. Audit engagement has not been performed in accordance with
c) Since auditor has no record of how risk of material misstatement was arrived at, it goes on to show SA 220.
non-compliance with SA 220. d) SQC 1 is not applicable in the case. Audit engagement has been performed in accordance with SA
d) Such a query, itself, is outside the mandate of authority. 220.
Ans: (c) Ans: (b)
3) Considering auditor’s point of view regarding engagement quality control review, identify
the most appropriate statement from below: -
a) Engagement quality control review is mandatory in such type of engagement. It was not proper
for auditor to bypass such review. He has violated mandatory requirement of SA 220.
b) Engagement quality control review is optional in such type of engagement. Therefore, question of
not following SA 220 does not arise.
c) No contentious matter arose during the course of engagement. Therefore, question of not following
SA 220 does not arise in respect of engagement quality control review.
d) Engagement quality control review is dependent upon benchmarks established under SQC 1. If
those bench marks are satisfied, such a review is necessary.
Ans: (a)
4) Considering auditor’s reply regarding errors in data feeding entry by junior staff in relation
to accounting standards, which of the following statements is proper?
a) Such are examples of clerical errors encountered during preparation of reports. There is no question
of non-compliance with SA 220.
b) Such are examples of clerical errors encountered during preparation of reports. There is no effect
on auditor’s opinion and consequently question of non-compliance with SA 220 does not arise.
c) Such are examples of serious lapses on part of auditor showing non-compliance with SA 220.
d) Such are examples of serious lapses on part of auditor. However, these are not related to compliance
with SA 220.
Ans: (c)

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QUALITY CONTROL
CA Harshad Jaju
1.24 Swapnil Patni Classes caharshad
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GENERAL AUDITING
2
CHAPTER
PRINCIPLES
AND AUDITOR’S
RESPONSIBILITIES
SA 240 – The Auditor’s Responsibilities Relating
to Fraud in an Audit of Financial Statements
Question 1
(Includes concepts of 143(12) Duties of Auditor & CARO)
On 15th March, 2020, the directors of Phony Ltd. instructed their accountant to enter purchases
amounting Rs. 1.02 crores from a company incorporated dated 11th March, 2020. However, no
amount was actually paid and Rs. 1.02 crore was provided in the books of account as purchases
for the year ending on 31st March, 2020.
On inspection, no documentary or other evidence of such purchases was found. As the auditor
of Phony Ltd., what would be your approach regarding reporting of such bogus purchases?
(MTP 5 Marks, May 20)
Answer 1
Reporting of Fraud Committed by Management/Directors of the Company: As per SA 240 on “The
Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, fraud can be
committed by management overriding controls using such techniques as recording fictitious journal
entries, particularly close to the end of an accounting period, to manipulate operating results or achieve
other objectives.
In the given case, Phony Ltd. has made purchases amounting Rs. 1.02 crores, at year-end. It also
debited the sum in the books of account; however, no documentary or other evidence of such purchases
was found, on investigation. It is clear that company has passed fictitious journal entries, near year-
end, to manipulate the operating results.
Accordingly, the auditor would adopt the approach which will be based on the result of misstatement
on the basis of such fictitious journal entry, i.e. if, as a result of a misstatement resulting from fraud
or suspected fraud, the auditor encounters exceptional circumstances that bring into question the
auditor’s ability to continue performing the audit, the auditor shall determine the professional and
legal responsibilities applicable in the circumstances, including whether there is a requirement for
the auditor to report to the person or persons who made the audit appointment or, in some cases,
to regulatory authorities; or the auditor may consider for appropriateness of withdrawal from such
engagement, where withdrawal from the engagement is legally permitted.
In addition, the auditor is required to report according to section 143(12) of the Companies Act, 2013.
As per section 143(12), if an auditor of a company in the course of the performance of his duties
CA Harshad Jaju
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GENERAL AUDITING PRINCIPLES AND AUDITOR’S RESPONSIBILITIES GENERAL AUDITING PRINCIPLES AND AUDITOR’S RESPONSIBILITIES
as auditor, has reason to believe that an offence of fraud, which involves or is expected to involve Question 3
individually an amount of Rs. 1 crore or above is being or has been committed in the company by its (Includes concepts of 143(12) Duties of Auditor, CARO & SA 580- Written representations)
officers or employees, he shall report the matter to the Central Government in prescribed manner. In the course of audit of K Ltd., its auditor Mr. ‘N’ observed that there was a special audit
The auditor is also required to report under clause (x) clause (xi)of paragraph 3 of Companies conducted at the instance of the management on a possible suspicion of a fraud and requested
(Auditor’s Report) Order, 2020, whether any fraud by the company or any fraud on the Company for a copy of the report to enable him to report on the fraud aspects. Despite many reminders it
by its officers or employees has been noticed or reported during the year. If yes, the nature and the was not provided. In absence of the special audit report, Mr. ‘N’ insisted that he be provided with
amount involved is to be indicated. at least a written representation in respect of fraud on/by the company. For this request also, the
management remained silent. Please guide Mr. ‘N’. (MTP 5 Marks, Oct 18, RTP May’18)
Answer 3
Question 2
Auditor’s Responsibilities Relating to Fraud: As per SA 240 on “The Auditor’s Responsibilities Relating
(Includes concepts of 143(12) Duties of Auditor & CARO)
to Fraud in an Audit of Financial Statements”, the auditor is responsible for obtaining reasonable
The Managing Director of the Company has committed a “Teeming and Lading” Fraud. The assurance that the financial statements, taken as a whole, are free from material misstatement, whether
amount involved has been however subsequently after the year end deposited in the company. caused by fraud or error.
As a Statutory Auditor, how would you deal? (MTP 4 Marks, March 18)
As per SA 580 “Written Representations”, if management modifies or does not provide the requested written
Answer 2 representations, it may alert the auditor to the possibility that one or more significant issues may exist.
Fraud Committed by Managing Director: The Managing Director of the company has committed a In the instant case, the auditor observed that there was a special audit conducted at the instance of the
“Teeming and Lading” fraud. The fact that the amount involved has been subsequently deposited management on a possible suspicion of fraud. Therefore, the auditor requested for special audit report
after the year end is not important because the auditor is required to perform his responsibilities which was not provided by the management despite of many reminders. The auditor also insisted
as laid down in SA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial for written representation in respect of fraud on/by the company. For this request also management
Statements”. First of all, as per SA 240, the auditor needs to perform procedures whether the financial remained silent.
statements are materially misstated. Because an instance of fraud cannot be considered as an isolated
It may be noted that, if management does not provide one or more of the requested written representations,
occurrence and it becomes important for the auditor to perform audit procedures and revise the audit
the auditor shall discuss the matter with management; re-evaluate the integrity of management and
risk assessment.
evaluate the effect that this may have on the reliability of representations (oral or written) and audit
Secondly, the auditor needs to consider the impact of fraud on financial statements and its disclosure evidence in general; and take appropriate actions, including determining the possible effect on the
in the audit report. Thirdly, the auditor should communicate the matter to the Chairman and Board opinion in the auditor’s report.
of Directors. Finally, in view of the fact that the fraud has been committed at the highest level of
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course
management, it affects the reliability of audit evidence previously obtained since there is a genuine
of the performance of his duties as auditor, has reason to believe that an offence involving fraud is
doubt about representations of management.
being or has been committed against the company by officers or employees of the company, he shall
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course immediately report the matter to the Central Government (in case amount of fraud is Rs. 1 crore or
of the performance of his duties as auditor, has reason to believe that an offence involving fraud is above) or Audit Committee or Board in other cases (in case the amount of fraud involved is less than
being or has been committed against the company by officers or employees of the company, he shall Rs. 1 crore) within such time and in such manner as may be prescribed.
immediately report the matter to the Central Government (in case amount of fraud is ` 1 crore or
The auditor is also required to report under clause (x) clause (xi)of paragraph 3 of Companies
above)or Audit Committee or Board in other cases (in case the amount of fraud involved is less than
(Auditor’s Report) Order, 2020, whether any fraud by the company or any fraud on the Company
` 1 crore) within such time and in such manner as may be prescribed.
by its officers or employees has been noticed or reported during the year. If yes, the nature and the
The auditor is also required to report under clause (x) clause (xi)of paragraph 3 of Companies (Auditor’s amount involved is to be indicated.
Report) Order, 2020, whether any fraud by the company or any fraud on the Company by its officers If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
or employees has been noticed or reported during the year. If yes, the nature and the amount involved exceptional circumstances that bring into question the auditor’s ability to continue performing the
is to be indicated. audit, the auditor shall:
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(i) Determine the professional and legal responsibilities applicable in the circumstances, including i. Recording fictitious journal entries, particularly close to the end of an accounting period, to
whether there is a requirement for the auditor to report to the person or persons who made the manipulate operating results or achieve other objectives.
audit appointment or, in some cases, to regulatory authorities; ii. Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
(ii) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the iii. Omitting, advancing or delaying recognition in the financial statements of events and transactions
engagement is legally permitted; and that have occurred during the reporting period.
(iii) If the auditor withdraws: iv. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
(1) Discuss with the appropriate level of management and those charged with governance, the auditor’s statements.
withdrawal from the engagement and the reasons for the withdrawal; and v. Engaging in complex transactions that are structured to misrepresenting the financial position or
(2) Determine whether there is a professional or legal requirement to report to the person or persons financial performance of the entity.
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s vi. Altering records and terms related to significant and unusual transactions.
withdrawal from the engagement and the reasons for the withdrawal.
Question 5
Question 4
M/s Prakash & Co., Chartered Accountants were appointed as statutory auditors of JIN Limited
In the course of audit of Kushal Ltd, you suspect that the management has made misstatements for the financial year 2021-22. During the course of audit, one of the partners CA Prakash
in the financial statements intentionally to deceive the users and to succumb to pressures to meet observed that there is misappropriation of assets in the form of theft of entity’s inventory
market expectations. Elucidate how the fraudulent financial reporting may be accomplished and is perpetrated by employees in relatively small and immaterial amounts. CA Prakash is
and also discuss the techniques of committing fraud by management overriding controls. (MTP concerned with the existence of certain circumstances for increasing the susceptibility of assets
5 Marks Oct 21, PYP 5 Marks Nov’20) to misappropriation. Guide CA Prakash with respect to risk factors related to misstatements
Answer 4 arising from misappropriation of assets with reference to relevant Standard on Auditing. (MTP
In the given case, management of Kushal Ltd has made intentional misstatements to deceive the 5 Marks March ’23, PYP 5 Marks Dec’21)
users in order to meet market expectations. Auditor is suspecting such intentional behavior of the Answer 5
management and in such situations, SA 240 discusses how fraudulent financial reporting may be Guidance to CA. Prakash with respect to risk factors that relate to misstatements arising from
accomplished and also discusses techniques of committing fraud by management overriding controls. misappropriation of assets as per SA 240 is:
As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an audit of Financial Statements”,
Statements” misappropriation of assets involves the theft of entity’s assets and is often perpetrated by employees in
Fraudulent financial reporting may be accomplished by the following: relatively small and immaterial amounts. However, it can also involve management who are usually
(i) Manipulation, falsification (including forgery), or alteration of accounting records or supporting more able to disguise or conceal misappropriations in ways that are difficult to detect.
documentation from which the financial statements are prepared. Misappropriation of assets can be accomplished in a variety of ways including stealing physical assets
(ii) Misrepresentation in or intentional omission from, the financial statements of events, transactions or intellectual property (for example, stealing inventory for personal use or for sale, stealing scrap for
or other significant information. resale, colluding with a competitor by disclosing technological data in return for payment).
(iii) Intentional misapplication of accounting principles relating to amounts, classification, manner of Risk factors that relate to misstatements arising from misappropriation of assets are also classified
presentation, or disclosure. according to the three conditions generally present when fraud exists: incentives/pressures,
opportunities, and attitudes/rationalization.
Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively. Fraud can be committed by management overriding controls using Incentives/Pressures
such techniques as: Personal financial obligations may create pressure on management or employees with access to cash
or other assets susceptible to theft to misappropriate those assets.
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Adverse relationships between the entity and employees with access to cash or other assets susceptible Attitudes/Rationalizations
to theft may motivate those employees to misappropriate those assets. For example, adverse (i) Disregard for the need for monitoring or reducing risks related to misappropriations of assets.
relationships may be created by the following:
(ii) Disregard for internal control over misappropriation of assets by overriding existing controls or
(i) Known or anticipated future employee layoffs. by failing to take appropriate remedial action on known deficiencies in internal control.
(ii) Recent or anticipated changes to employee compensation or benefit plans. (iii) Behavior indicating displeasure or dissatisfaction with the entity or its treatment of the employee.
(iii) Promotions, compensation, or other rewards inconsistent with expectations. (iv) Changes in behavior or lifestyle that may indicate assets have been misappropriated.
Opportunities (v) Tolerance of petty theft.
Certain characteristics or circumstances may increase the susceptibility of assets to misappropriation.
For example, opportunities to misappropriate assets increase when there are the following: EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
(i) Large amounts of cash on hand or processed. SA 240 - Risk factors related to misstatements arising from misappropriation of assets: Examinees
(ii) Inventory items that are small in size, of high value, or in high demand. correctly referred to SA 240 and listed down the risk factors correctly. However, the concept /
examples of misappropriation of assets and proper explanation of risk factors were not given by
(iii) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
examinees.
(iv) Fixed assets which are small in size, marketable, or lacking observable identification of ownership.
Inadequate internal control over assets may increase the susceptibility of misappropriation of those Question 6
assets. For example, misappropriation of assets may occur because there is the following: (Includes concepts of 143(12) Duties of Auditor & CARO)
(i) Inadequate segregation of duties or independent checks. M/s Innocent Limited has entered into a transaction on 25th February, 2018, near year-end,
(ii) Inadequate oversight of senior management expenditures, such as travel and other whereby it has agreed to pay Rs. 5 lakhs per month to Mr. Yuvraj as annual retainer-ship fee
reimbursements. for “engineering consultation”. No amount was actually paid, but Rs. 60 lakhs are provided in
books of account as on March 31, 2018.
(iii) Inadequate management oversight of employees responsible for assets, for example, inadequate
supervision or monitoring of remote locations. Your inquiry elicits a response that need-based consultation was obtained round the year, but
there is no documentary or other evidence of receipt of the service. As the auditor of M/s Innocent
(iv) Inadequate job applicant screening of employees with access to assets.
Limited, what would be your approach? (RTP Nov 18)
(v) Inadequate record keeping with respect to assets.
Answer 6
(vi) inadequate system of authorization and approval of transactions (for example, in purchasing).
As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
(vii) Inadequate physical safeguards over cash, investments, inventory, or fixed assets. Statements”, fraud can be committed by management overriding controls using such techniques as
(viii) Lack of complete and timely reconciliations of assets. Recording fictitious journal entries, particularly close to the end of an accounting period, to manipulate
operating results or achieve other objectives.
(ix) Lack of timely and appropriate documentation of transactions, for example, credits for
merchandise returns. Keeping in view the above, it is clear that Company has passed fictitious journal entries near year
end to manipulate the operating results. Also, Auditor’s enquiry elicited a response that need-based
(x) Lack of mandatory vacations for employees performing key control functions.
consultation was obtained round the year, but there is no documentary or other evidence of receipt of
(xi) Inadequate management understanding of information technology, which enables information the service, is not acceptable.
technology employees to perpetrate a misappropriation.
Accordingly, the auditor would adopt the following approach-
(xii) Inadequate access controls over automated records, including controls over and review of
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
computer systems event logs.
exceptional circumstances that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:

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(i) Determine the professional and legal responsibilities applicable in the circumstances, including Answer 7
whether there is a requirement for the auditor to report to the person or persons who made the As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”
audit appointment or, in some cases, to regulatory authorities; and SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding
(ii) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the the Entity and Its Environment”, the auditor shall identify and assess the risks of material misstatement
engagement is legally permitted; and due to fraud at the financial statement level, and at the assertion level for classes of transactions, account
(iii) If the auditor withdraws: balances and disclosures. When identifying and assessing the risks of material misstatement due to
fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition,
(1) Discuss with the appropriate level of management and those charged with governance, the
evaluate which types of revenue, revenue transactions or assertions give rise to such risks.
auditor’s withdrawal from the engagement and the reasons for the withdrawal; and
In accordance with SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
(2) Determine whether there is a professional or legal requirement to report to the person or persons
Statements” and 330,” The Auditor’s Responses to Assessed Risks” the auditor shall determine overall
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s
responses to address the assessed risks of material misstatement due to fraud at the financial statement
withdrawal from the engagement and the reasons for the withdrawal.
level and assertion level.
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course
The presumption that there are risks of fraud in revenue recognition may be rebutted. For example,
of the performance of his duties as auditor, has reason to believe that an offence involving fraud is
the auditor may conclude that there is no risk of material misstatement due to fraud relating to revenue
being or has been committed against the company by officers or employees of the company, he shall
recognition in the case where there is a single type of simple revenue transaction, for example,
immediately report the matter to the Central Government (in case amount of fraud is Rs. 1 crore or
leasehold revenue from a single unit rental property. However, when there is a complex revenue
above) or Audit Committee or Board in other cases (in case the amount of fraud involved is less than
structure or when there is lack of controls on revenue recognition, then there is a high probability of
Rs. 1 crore) within such time and in such manner as may be prescribed.
fraud risk in revenue recognition.
The auditor is also required to report as per Clause (x) of Paragraph 3 of CARO, 2016, Whether any
Obtaining an understanding of the entity and its environment, including the entity’s internal control
fraud by the company or any fraud on the company by its officers or employees has been noticed or
(referred to hereafter as an “understanding of the entity”), is a continuous, dynamic process of
reported during the year; If yes, the nature and the amount involved is to be indicated.
gathering, updating and analyzing information throughout the audit.
In the current scenario, the company was earning revenue from multiple streams. Also, it was identified
Question 7 that the controls are not properly designed to mitigate the risk of fraud and risk of improper revenue
recognition. During the year it was identified that the management did not account for revenue from
Arihant Limited was engaged in the business of owning and managing hotels and resorts, selling
corporate hotel bookings amounting to ` 35 crore. These amounts were partially received in the
tourism packages and performing airline bookings for corporate and individuals. It appointed
company’s bank accounts and partially received in the CFO’s personal account. The amounts received
Upadhyay & Co. as its statutory auditor for the financial year 2021-22. While planning the audit,
in the bank account of the company were disclosed as advances received against future bookings.
the audit team decided that the risk of improper revenue recognition from hotel business should not
be treated as a fraud risk. This conclusion was based on the assessment of earlier years, wherein no Therefore, the auditor while performing the risk assessment procedures should consider the complexity
fraud was identified in revenue recorded from such business. While testing the internal financial and nature of the revenue for determining the fraud risks in revenue recognition. Also, there were no
controls over the process of revenue recognition, it was identified that the controls are not properly adequate controls addressing the risk of improper revenue recognition or fraud risk, the audit team
designed to mitigate the risk of fraud and risk of improper revenue recognition. As a result, the rebutted the fraud risk. Moreover, the audit team should have recognized fraud risk by identifying
audit team decided to perform additional substantive testing. However, the audit team still were to the deficiencies of internal control over the revenue recognition process and should have treated the
the conclusion that there is no risk of fraud in revenue recognition. During the course of substantive risk of improper revenue recognition as a significant risk. Also, as per Section 143(12), the auditor is
testing, it was identified that the management did not account for revenue received from corporate required to report all the frauds identified during the course of the audit involving amounts above ` 1
hotel bookings amounting to ` 35 crore. These amounts were partially received in the company’s crore within the prescribed time frame to the Central Government.
bank accounts and partially received in the CFO’s personal account. The amounts received in the
bank account of the company were disclosed as advances received against the future bookings.
In the light of above scenario, kindly guide the statutory auditors with respect to their
responsibility relating to fraud in an audit of a financial statement. (RTP Nov’22)
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SA 250 – Consideration of Laws and Regulations Question 2
in an Audit of Financial Statements (Includes concepts of SA 705- Modifications to the Opinion in the Independent Auditor’s
Report) While verifying the employee records in a company, it was found that a major portion
of the labour employed was child labour. On questioning the management, the auditor was told
Question 1 that it was outside his scope of the financial audit to look into the compliance with other laws.
(Includes concepts of CARO) Comment in accordance with relevant Standards on Auditing. (MTP 4 Marks, May 20 & April
21 & March ’23, RTP May’18)
During the course of audit of CT Ltd. for the financial year 2017-18, it is noticed that Rs. 3.00
lakhs of employee contribution and Rs. 7.50 lakhs of employer contribution towards employee Answer 2
state insurance contribution have been accounted in the books of accounts in respective heads. Compliance with Other Laws: As per SA 250, “Consideration of Laws and Regulations in an Audit
Whereas, it was found that Rs. 5.00 lakhs only has been deposited with ESIC department of Financial Statements”, the auditor shall obtain sufficient appropriate audit evidence regarding
during the year ended 31st March, 2018. The Finance Manager informed the auditor that due to compliance with the provisions of those laws and regulations generally recognised to have a direct
financial crunch they have not deposited the amount due, but will deposit the amount overdue effect on the determination of material amounts and disclosures in the financial statements including
along with interest as and when financial position improves. Comment as a statutory auditor. tax and labour laws.
(MTP 5 Marks, Aug 18 & April 18)
Further, non-compliance with other laws and regulations may result in fines, litigation or other
Answer 1 consequences for the entity, the costs of which may need to be provided for in t he financial statements,
Non-Compliance of Laws and Regulations & Reporting Requirements: As per SA 250 “Consideration but are not considered to have a direct effect on the financial statements.
of Laws and Regulations in an Audit of Financial Statement”, it is the responsibility of management, In the instant case, major portion of the labour employed in the company was child labour. While
with the oversight of those charged with governance, to ensure that the entity’s operations are questioning by auditor, reply of the management that it was outside his scope of financial audit to
conducted in accordance with the provisions of laws and regulations, including compliance with the look into the compliance with other laws is not acceptable as it may have a material effect on financial
provisions of laws and regulations that determine the reported amounts and disclosures in an entity’s statements.
financial statements. The auditor is responsible for obtaining reasonable assurance that the financial
Thus, auditor should ensure the disclosure of above fact and provision for the cost of fines, litigation or
statements, taken as a whole, are free from material misstatement, whether caused by fraud or error.
other consequences for the entity. In case if the auditor concludes that non- compliance has a material
In conducting an audit of financial statements, the auditor takes into account the applicable legal and
effect on the financial statements and has not been adequately reflected in the financial statements,
regulatory framework. If the auditor concludes that the non- compliance has a material effect on the
the auditor shall express a qualified or adverse opinion on the financial statement as per SA 705
financial statements, and has not been adequately reflected in the financial statements, the auditor
“Modifications to the Opinion in the Independent Auditor’s Report”.
shall express a qualified or adverse opinion on the financial statements.
Further, the auditor is required to report under clause (vii)(a) of Para 3 of CARO, 2020 whether the
company is regular in depositing undisputed statutory dues including employees’ state insurance with Question 3
the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at (Includes concepts of CARO)
the last day of the financial year concerned for a period of more than six months from the date they
XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-18 for audit. The
became payable, shall be indicated by the auditor.
audit assistant observes and brings to your notice that the company’s records show following
In the instant case, even though accrual principles have been followed, disclosure of non-payment is dues:
necessary. The auditor should disclose the fact of non-payment of rupees 7.50 lakhs in his report.
Income Tax relating to Assessment Year 2014-15 Rs. 125 lacs - Appeal is pending before Hon’ble
ITAT since 30-9-16.
Customs duty Rs. 85 lakhs - Demand notice received on 15-9-17 but no action has been taken
to pay or appeal. Comment.
As an auditor, how would you bring this fact to the members? (MTP 5 Marks, Oct 18)

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Answer 3 OR
Non-Compliance of Laws and Regulations: As per SA 250 “Consideration of Laws and Regulations You are appointed as an auditor of Moksh Ltd., a company engaged in export of agricultural
in an Audit of Financial Statement”, it is the responsibility of management, with the oversight of those equipment. During the course of audit, your audit team informed you regarding non-deduction
charged with governance, to ensure that the entity’s operations are conducted in accordance with the of TDS on huge payments made to legal counsel of Moksh Ltd. You want to alert your team on the
provisions of laws and regulations, including compliance with the provisions of laws and regulations possibility of noncompliance with Laws and Regulations by Moksh Ltd. Help your audit team
that determine the reported amounts and disclosures in an entity’s financial statements. in identifying any other indications of non-compliance with Laws and Regulations particularly
The auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a related to payments made by the company. (MTP 4 Marks April ’23)
whole, are free from material misstatement, whether caused by fraud or error. In conducting an audit OR
of financial statements, the auditor takes into account the applicable legal and regulatory framework. R & M Co. wants to be alert on the possibility of non-compliance with Laws and Regulations
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material during the course of audit of SRS Ltd. R & M Co. seeks your guidance for identifying the
misstatements in the financial statements may not be detected, even though the audit is properly indications of noncompliance with Laws and Regulations. (Old SM)
planned and performed in accordance with the SAs. Answer 4
If the auditor concludes that the non-compliance has a material effect on the financial statements, and Indications of Non-Compliance with Laws and Regulations: When the auditor becomes aware of the
has not been adequately reflected in the financial statements, the auditor shall express a qualified or existence of, or information about, the following matters, it may be an indication of non-compliance
adverse opinion on the financial statements. with laws and regulations, possible areas or aspects to look out for forming an opinion are:
Further, the auditor is required to report on certain matters specified in Para 3 of CARO, 201 6 under • Investigations by regulatory organisations and government departments or payment of fines or
section 143 of the Companies Act, 2013. penalties.
One of such matter is non-payment of dues to Government, on account of any dispute. As per clause • Payments for unspecified services or loans to consultants, related parties, employees or government
(vii)(b) of Para 3 of CARO, 2020, in case dues of income tax or sales tax or service tax or duty of employees.
customs or duty of excise or value added tax have not been deposited on account of any dispute, then
• Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the
the amounts involved and the forum where dispute is pending shall be mentioned.
entity or in its industry or to the services actually received.
In the present case, there is Income Tax demand of Rs. 125 Lacs and the company has gone for an
• Purchasing at prices significantly above or below market price.
appeal, it needs considerations as to whether the entire demand is disputed, because it is difficult
to presume that the demand by Income Tax authority is without any basis. Therefore, as per AS 29 • Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers
“Provisions, Contingent Liabilities and Contingent Assets”, partly to the extent the company considers to numbered bank accounts.
that the demand is based on some logical basis, that amount may be provided for and the remaining • Unusual payments towards legal and retainership fees.
may be disclosed as the contingent liability. Further, it should be brought to notice of the members by
• Unusual transactions with companies registered in tax havens.
reporting.
• Payments for goods or services made other than to the country from which the goods or services
Additionally, the demand notice has been received for Customs duty of Rs. 85 lakhs and is outstanding
originated.
on the closure of financial year, for which no action has been taken by the management. Therefore, it
should also be brought to notice of the members by reporting. • Payments without proper exchange control documentation.
• Existence of an information system which fails, whether by design or by accident, to provide an
adequate audit trail or sufficient evidence.
Question 4
• Unauthorised transactions or improperly recorded transactions.
As an Auditor of TRP Ltd., you are suspicious that there might be non-compliance with laws
and regulations to which the Company is subject to. Indicate the possible areas or aspects where • Adverse media comment.
you may have to look out for forming an opinion as to whether your suspicion has some basis to
further inquire. (MTP 4 Marks Oct 21, PYP 4 Marks, May ’18)

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treating it, on the nearby grounds, and because of this, the nearby water bodies were getting
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
polluted. Based on the preliminary investigation performed by the regional forest department
Indications of Non-compliance with Laws and Regulations: Instead of emphasizing the indications under the directions of the National Green Tribunal, it was identified that these practices were
of Non Compliance with Laws and Regulations some examinees gave general answers on SA 250. carried out since 2009 and a lot of damage has been done to the environment by Abhinandan
Limited. A show cause notice was already issued to Abhinandan Limited by the National Green
Question 5 Tribunal for levying the penalty of an amount of ` 500 crore. The unaudited profit for the
CA Abhinanadan is an auditor of KM Private Limited. During the course of audit, CA financial year 2021 -22 of Abhinandan Limited was ` 35 crore and the unaudited turnover was `
Abhinanadan becomes aware of information concerning an instance of non- compliance or 100 crore. Upon inquiry it was identified that Abhinandan Limited has disclosed this matter in
suspected non-compliance with laws and regulations. Being a senior partner of CA. Abhinanadan, the financial statements by way of footnote, the extract of which is provided below:
guide him regarding audit procedures to be followed when non-compliance is identified or “The company has received a show cause notice from the National Green Tribunal for some
suspected. (RTP May 22) potential violation of environmental laws and the company’s legal department has assessed and
Answer 5 found that the judgment would be in favour of the company. Accordingly, no provision has been
created for such notices.”
As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, if the
auditor becomes aware of information concerning an instance of non-compliance or suspected non- In the light of the above scenario kindly provide what should be the appropriate opti on for the
compliance with laws and regulations, the auditor shall obtain: statutory auditor of the company to report this matter. (RTP Nov’22)
(i) An understanding of the nature of the act and the circumstances in which it has occurred; and Answer 6
(ii) Further information to evaluate the possible effect on the financial statements. As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, the
auditor is required to obtain an understanding and need to evaluate the impact of other laws and
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
regulations that do not have a direct effect on the determination of the amounts and disclosures in the
management and, where appropriate, those charged with governance. If management or, as appropriate,
financial statements, but compliance with which may be fundamental to the operating aspects of the
those charged with governance do not provide sufficient information that supports that the entity is in
business, to an entity’s ability to continue its business, or to avoid material penalties (for example,
compliance with laws and regulations and, in the auditor’s judgment, the effect of the suspected non-
compliance with the terms of an operating license, compliance with regulatory solvency requirements,
compliance may be material to the financial statements, the auditor shall consider the need to obtain
or compliance with environmental regulations); non-compliance with such laws and regulations may
legal advice.
therefore have a material effect on the financial statements.
If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate
The auditor shall perform the following audit procedures to help identify instances of non - compliance
the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
with other laws and regulations that may have a material effect on the financial statements:
The auditor shall evaluate the implications of non-compliance in relation to other aspects of the
(a) Inquiring of management and, where appropriate, those charged with governance, as to whether
audit, including the auditor’s risk assessment and the reli ability of written representations, and take
the entity is in compliance with such laws and regulations; and
appropriate action.
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities As per
Section 143(3)(j) read with Rule 11(a), the auditor is required to report whether the company
Question 6 has disclosed the impact, if any, of pending litigations on its financial position in its financial
statement.
(Includes concepts of section 143 & SA 705 Modification of Opinion)
As per SA 570, “Going Concern”, if the auditor concludes that management’s use of the going concern
Abhinandan Limited a chemical manufacturing company, having its factory located at Nanded
basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor
Village, for the year 2021-22 appointed Subahu & Co. as their statutory auditors. During the
shall determine whether the financial statements:
course of the audit, Subahu & Co. identified that Abhinandan Limited received a show cause
notice from National Green Tribunal based on the investigation performed by the regional forest (i) Adequately disclose the principal events or conditions that may cast significant doubt on the
department for violating environmental laws. Upon gathering a further understanding of the entity’s ability to continue as a going concern and management’s plans to deal with these events
said matter, it was identified that Abhinandan Limited was dumping toxic solid waste, without or conditions; and
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(ii) Disclose clearly that there is material uncertainty related to events or conditions that may cast • Monitoring legal requirements and ensuring that operating procedures are designed to meet these
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may requirements.
be unable to realize its assets and discharge its liabilities in the normal course of business. • Instituting and operating appropriate systems of internal control.
If adequate disclosure about the material uncertainty is not made in the financial statements, the • Developing, publicizing and following a code of conduct.
auditor shall (a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA
• Ensuring employees are properly trained and understand the code of conduct.
705; and (b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going • Monitoring compliance with the code of conduct and acting appropriately to discipline employees
concern and that the financial statements do not adequately disclose this matter. who fail to comply with it.
In the current scenario, Abhinandan Limited has received a show cause notice from the National • Engaging legal advisors to assist in monitoring legal requirements.
Green Tribunal of an amount which is more than the net profit and the turnover of the company for • Maintaining a register of significant laws and regulations with which the entity has to comply
the year. within its particular industry and a record of complaints.
In the event of an unfavorable order for Abhinandan Limited, there will be an impact on Abhinandan
Limited’s ability to continue as a going concern.
Question 8
As a result, appropriate disclosure should be provided by management for such events which cast
significant doubt on the entity’s ability to continue as a going concern. As no appropriate disclosure PQ Limited, a listed entity, is in the business of manufacturing of specialty chemicals. The
has been provided by Abhinandan Limited for such show cause notice, Subahu & Co. should report company has appointed CA Jazz as CFO of the company. CA Jazz is concerned about compliance
this matter in their audit report under “Going Concern Para” as per SA 570 and under clause (j) of with the provisions of laws and regulations that determine the reported amounts and disclosure
Section 143(3) of the Companies Act, 2013. Also, the auditor is required to issue an adverse opinion in financial statements of PQ Limited. Accordingly, CA Jazz wants to implement such policies
as per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”. and procedures that can assist him in the prevention and detection of non-compliance with
laws and regulations. Help CA Jazz by citing examples of such policies and procedures. (PYP 5
Marks, NOV-20)
Question 7 Answer 8
CA Paras has been appointed as the Chief Financial Officer (CFO) of Prashanth Limited. In In PQ Ltd, listed entity, CA Jazz has been appointed as CFO. PQ Ltd is in the business of manufacturing
this role, CA Paras is tasked with the responsibility of ensuring that the company’s entity’s of specialty chemicals. CA Jazz is concerned about compliance with the provisions of Laws and
operations are conducted in accordance with relevant laws and regulations. As part of his duties, regulations and wants to implement such policies and procedures that would assist him in prevention
CA Paras is emphasising the importance of adhering to all applicable laws and regulations and detection of non-compliance with laws and regulations. CA Jazz is specifically wanting examples
that could impact the entity’s specific disclosures in its financial statements. Additionally, he is of types of policies and procedures that PQ Ltd may implement so that relevant laws and regulations
focusing on compliance with laws and regulations that dictate the appropriate financial reporting are properly complied with. Such examples of policies and procedures are given in SA250.
framework for the company. CA Paras is also highlighting the significance of avoiding any non-
• As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”,
compliance, as certain laws and regulations may impose penalties in the event of violations.
Now CA Paras wants to implement policies and procedures in an entity that can assist in the • The following are examples of the types of policies and procedures PQ Ltd. may implement to
prevention and detection of non-compliance with the laws and regulations. Help CA Paras by assist in the prevention and detection of non-compliance with laws and regulations:
citing examples of such policies and procedures. (RTP Nov ’23) (i) Monitoring legal requirements and ensuring that operating procedures are designed to meet
Answer 7 these requirements.
Management Responsibility for Compliance with Laws and Regulations: (ii) Instituting and operating appropriate systems of internal control.
SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, states that it is (iii) Developing, publicizing and following a code of conduct.
the responsibility of management, with the oversight of those charged with governance to ensure that (iv) Ensuring employees are properly trained and understand the code of conduct.
the entity’s operations are conducted in accordance with the provisions of laws and regulations. For
this purpose, management may apply the following procedures:
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(i) Monitoring compliance with the code of conduct and acting appropriately to discipline employees MULTIPLE CHOICE QUESTIONS (MCQS)
who fail to comply with it.
Question 1
(ii) Engaging legal advisors to assist in monitoring legal requirements.
KJA Ltd is in the business of consultancy services. The business of the company has been
(iii) Maintaining a register of significant laws and regulations with which the entity has to comply growing significantly and considering the nature of business, it becomes subject to various laws
within its particular industry and a record of complaints. and regulations.
Compliances have also increased because of this and management has found this very difficult to
keep in pace with the changing regulatory requirements. The statutory auditors of the company,
Shilpa & Associates, have considered compliance with laws and regulations as a significant risk
for the purpose of their audit.
Auditors had a audit planning meeting with the management and management has understood
that it will be their responsibility including those charged with governance to ensure that the
company’s operations are fully compliant with the provisions of various laws and regulations.
This may also have an impact on the reported amounts and disclosures in the financial statements
of the company.
Management is planning to ensure full compliance and may implement policies and procedures,
wherever required, to assist in the prevention and detection of non-compliance with laws and
regulations. Please suggest among the following which one will not be a policy/ procedure to
be implemented to assist in the prevention and detection of non-compliance with laws and
regulations in accordance with SA 250?
(a) Maintaining a register of significant transactions of the company with comparison to particular
industry and a record of complaints.
(b) Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.
(c) Developing, publicizing and following a code of conduct.
(d) Instituting and operating appropriate systems of internal control. (MTP 2 Marks, Mar 19)
Ans: (a)
Question 2
Shripal Company got a show cause notice from State Pollution Control Board for the
contravention of the provisions of Hazardous and waste Management Rule. As per SA 250,
the auditor shall perform the audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial statements. As
the audit team of the company became aware of information concerning an instance of non-
compliance with law, what would NOT be the audit procedure to be performed?

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(a) Understand the nature of the act and circumstances in which it has occurred and obtain further Question 1
information to evaluate the possible effect on the financial statement. A, B and C are joint auditors of a company. B is of the opinion that there are material misstatements
(b) Discuss the matter with management and if they do not provide sufficient information; and if the in financial statements of a company which, if accounted for, would turn profit reflected in
effect of non-compliance seems to be material, legal advice may be obtained. financial statements for 25 crores to a loss of ₹ 5 crores. He, therefore, wants an adverse opinion
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating to be expressed in audit report. However, A and B do not concur with his views and are inclined
procedures are designed to assist in the prevention of non-compliance with law and regulation and to accept management’s version. Is B required to go by majority opinion of 2-1?
report accordingly. Answer 1
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including risk Where the joint auditors are in disagreement with regard to the opinion or any matters to be covered
assessment and reliability of written representation and take appropriate action. (MTP 1 Mark by the audit report, they shall express their opinion in a separate audit report. A joint auditor is not
April 22) bound by the views of the majority of the joint auditors regarding the opinion or matters to be covered
Ans: (c) in the audit report and shall express opinion formed by the said joint auditor in separate audit report
in case of disagreement. Therefore, B is not required to go by majority opinion of 2-1.
In such circumstances, the audit report issued by the joint auditors shall make a reference to the
Question 3 separate audit report issued by the other joint auditor. Further, separate audit report shall also make
M/s ADI & Associates are the statutory auditors of PRAKASH Ltd. for the financial year 2022- reference to the audit report issued by other joint auditors. Such reference shall be made under the
23. While conducting the audit, CA Saurabh, the engagement partner noticed the following: heading “Other Matter Paragraph” as per SA 706.
• Payments to various government employees not supported by any document.
• Notices received from various regulatory authorities. Question 2
• Payments of various fines and penalties CA. Shelly Goel is offered appointment as auditor of RUTE Limited, a listed company. The audit
• Heavy payments to legal counsels. committee of the company wants her to justify independence in relation to company through
proper communication.
• Unusual cash payments
Although she has ensured that there are no threats to her independence, she feels requirement
CA Saurabh should consider the above as indicative of:
of audit committee to be beyond its purview. What is your opinion in this regard?
(a) Doubt on the accounting system of PRAKASH Ltd.
Answer 2
(b) Doubt of non-compliance to laws by PRAKASH Ltd.
As required in SA 260, in the case of listed entities, the auditor shall communicate with those
(c) Doubt on the going concern assumption of PRAKASH Ltd. charged with governance: -
(d) Doubt on Internal Controls of PRAKASH Ltd. (RTP May ’23) A statement that the engagement team and others in the firm as appropriate, the firm and, when
Ans: (b) applicable,network firms have complied with relevant ethical requirements regarding independence
and
i. All relationships and other matters between the firm, network firms, and the entity that, in the
auditor’s professional judgment, may reasonably be thought to bear on independence. This shall
include total fees charged during the period covered by the financial statements for audit and non-
audit services provided by the firm and network firms to the entity and components controlled by
the entity. These fees shall be allocated to categories that are appropriate to assist those charged
with governance in assessing the effect of services on the independence of the auditor and
ii. The related safeguards that have been applied to eliminate identified threats to independence or
reduce them to an acceptable level.
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Question 3 Answer 5
You are auditor of a social media company. Of late, government has tightened noose around During the course of audit, the engagement partner, Mr. Manohar notices a misstatement resulting
companies operating in this segment by bringing in a maze regulatory legislations to protect from a suspected fraud that brings into question the audit team’s ability to continue performing the
interests of users. How you can proceed to verify that company is compliant with new regulatory audit. In such a situation the audit team should:
requirements? Besides, what does above situation underscore to you as an auditor? (a) Determine the professional and legal responsibilities applicable in the circumstances, including
Answer 3 whether there is a requirement for the auditor to report to the person or persons who made the
It needs to be verified that the company has put in place systems and procedures to meet with new audit appointment or, in some cases, to regulatory authorities;
regulatory requirements. The same can be verified by examining policies and procedures developed (b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
by company in this regard like devising appropriate system of internal control, sensitizing employees engagement is legally permitted; and
regarding new rules, engaging legal advisors etc. (c) If the auditor withdraws: -
Further, financial stability of the company may be threatened due to new regulatory requirements. (i) Discuss with the appropriate level of management and those charged with governance, the
The management may be under pressure. It is also a fraud risk factor and may need to be evaluated auditor’s withdrawal from the engagement and the reasons for the withdrawal and
by auditor.
(ii) Determine whether there is a professional or legal requirement to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities, the
Question 4 auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Discuss why the potential effects of inherent limitations of an auditor’s ability to detect material
misstatements described in SA 200 are far greater in respect of-compliance with laws and Question 6
regulations?
CAAnand is the engagement partner for the audit assignment of NHT Ltd. engaged in manufacture
Answer 4 of Iron and Steel bars. The company has its plants in the state of Sikkim. While verifying the wages
In the context of laws and regulations, the potential effects of inherent limitations on the auditor’s record of the company, CA Anand found that maximum of the labour employed in the plants of
ability to detect material misstatements are greater for such reasons as the following: - the company was child labour. He questioned the management of the company about the same to
• There are many laws and regulations, relating principally to the operating aspects of an entity that which the management replied that looking into the compliance of such law is outside his scope of
typically do not affect the financial statements and are not captured by the entity’s information financial audit. Give your comments with respect to such situation.
systems relevant to financial reporting. Answer 6
• Non-compliance may involve conduct designed to conceal it, such as collusion, forgery, deliberate As per SA 250 “Considerations of Laws and Regulations in an Audit of Financial Statements”, the
failure to record transactions, management override of controls or intentional misrepresentations auditor is not responsible for preventing non-compliance and cannot be expected to detect non-
being made to the auditor. compliance with all laws and regulations. The auditor is responsible for obtaining reasonable assurance
• Whether an act constitutes non-compliance is ultimately a matter for legal determination by a that the financial statements, taken as a whole, are free from material misstatement, whether caused
court of law. by fraud or error. In conducting an audit of financial statements, the auditor takes into account the
applicable legal and regulatory framework.
For the compliance with provisions of those laws and regulations generally recognized to have a
Question 5 direct effect on the determination of material amounts and disclosures in the financial statements, the
MN & Associates are the statutory auditors of ABC Ltd. for the FY 2-02221. During the course of auditor’s responsibility is to obtain sufficient appropriate audit evidence about compliance with the
audit, the engagement partner, Mr. Manohar notices a misstatement resulting from a suspected provisions of those laws and regulations.
fraud that brings into question the audit team’s ability to continue performing the audit. How For other laws and regulations that do not have a direct effect on the determination of the amounts
should the audit team deal with the situation? and disclosures in the financial statements but compliance with which may be fundamental to the
operating aspects of the business, the auditor’s responsibility is limited to undertaking specified audit
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procedures to help identify non-compliance with those laws and regulations that may have a material (e) presentation and disclosure of the financial statements as required by the applicable financial
effect on the financial statements. reporting framework
In the instant case, maximum of the labour employed in the plants of the company was child labour. (f) ensuring that the audit report complies with the requirements of the relevant statutes, the applicable
When CA Anand questioned the management of the company about the same, the management Standards on Auditing and the other relevant pronouncements issued by ICAI.
replied that looking into the compliance of such law is outside his scope of financial audit. Such reply Where, in the course of the audit, a joint auditor comes across matters which are relevant to the areas of
by the management is not acceptable as such situation may have a material effect on the financial responsibility of other joint auditors and which deserve their attention, or which require disclosure or
statements. Therefore, CA Anand should ensure as to whether any penal provisions will be there for require discussion with, or application of judgment by other joint auditors, the said joint auditor shall
non- compliance of such law and also whether the same has been duly disclosed by the company. communicate the same to all the other joint auditors in writing prior to the completion of the audit.
If CA Anand concludes that such non- compliance has a material effect on the financial statements
It shall be the responsibility of each joint auditor to determine the nature, timing and extent of audit
and the same has not been adequately reflected in the financial statements by the company, he shall
procedures to be applied in relation to the areas of work allocated to said joint auditor. It is the
express an adverse or a qualified opinion on the financial statements.
individual responsibility of each joint auditor to study and evaluate the prevailing system of internal
control and assessment of risk relating to the areas of work allocated to said joint auditor.
Question 7 As regards decisions taken by all the joint auditors under audit planning in respect of common audit
Magnet Interiors Ltd. is a listed company engaged in the manufacture of office furniture. The areas concerning the nature, timing and extent of the audit procedures to be performed by each of
company has its activities divided into four geographic regions. The company has appointed the joint auditors, all the joint auditors are responsible only in respect of the appropriateness of
two joint auditors, namely, AB & Co. and & Co. to conduct the joint audit of the financial the decisions concerning the nature, timing and extent of the audit procedures agreed upon among
statements of the company for the year ending 31.03.2023. The engagement partners from both them, proper execution of these audit procedures is the individual responsibility of the joint auditor
the firms, CA Amar and CA Chetanya along with their audit teams had a meeting to discuss the concerned.
areas of the work to be divided and their respective responsibilities.
Explain the responsibilities of the joint auditors with respect to such joint audit. Question 8
Answer 7 MNO Ltd. gets its accounting data processed by a service organization. CA Riya is the statutory
As per SA 299 “Joint Audit of Financial Statements”, in respect of audit work divided among the auditor of MNO Ltd. CA Riya wants to obtain an understanding as to how MNO Ltd. is using
joint auditors, each joint auditor shall be responsible only for the work allocated to such joint auditor the services of the service organization. What all understanding should she obtain?
including proper execution of the audit procedures. In cases where specific divisions, zones or units Answer 8
are allocated to different joint auditors, it is the separate and specific responsibility of each joint
When obtaining an understanding of MNO Ltd. (user entity) in accordance with SA 315, CA Riya
auditor to obtain information and explanations from the management in respect of such divisions/
shall obtain an understanding of how MNO Ltd. uses the services of a service organization in its
zones/units and to evaluate the information and explanations so obtained by said joint auditor. The
operations, including: -
joint auditors shall have proper coordination and rationality wherever required.
(a) The nature of the services provided by the service organization and the significance of those
All the joint auditors shall be jointly and severally responsible for: -
services to the user entity, including the effect thereof on the user entity’s internal control.
(a) the audit work which is not divided among the joint auditors and is carried out by all joint auditors Information on nature of services provided by a user organization may be available from sources
(b) decisions taken by all the joint auditors under audit planning in respect of common audit areas such as user manuals, contract between the user entity and service organization, reports by service
concerning the nature, timing and extent of the audit procedures to be performed by each of the auditors etc.
joint auditors. (b) The nature and materiality of the transactions processed or accounts or financial reporting
(c) matters which are brought to the notice of the joint auditors by any one of them and on which processes affected by the service organization. In certain situations, the transactions processed and
there is an agreement among the joint auditors the accounts affected by the service organization may not appear to be material to the user entity’s
(d) examining that the financial statements of the entity comply with the requirements of the relevant financial statements, but the nature of the transactions processed may be significant and the user
statutes auditor may determine that an understanding of those controls is necessary in the circumstances.

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(c) The degree of interaction between the activities of the service organization and those of the user (e) Any other significant matters arising during the audit that, in the auditor’s professional judgment,
entity. The degree of interaction refers to the extent to which a user entity is able to and elects are relevant to the oversight of the financial reporting process.
to implement effective controls over the processing performed by the service organization. For The communication of findings from the audit may include requesting further information from
example, a high degree of interaction exists between the activities of the user entity and those at those charged with governance in order to complete the audit evidence obtained. For example, the
the service organization when the user entity authorizes transactions and the service organization auditor may confirm that those charged with governance have the same understanding of the facts and
processes and does the accounting for those transactions circumstances relevant to specific transactions or events.
(d) The nature of the relationship between the user entity and the service organization, including the
relevant contractual terms for the activities undertaken by the service organization.
Question 10
My Decor Limited, presently engaged in manufacturing of fabrics, wants to set up a new plant
Question 9 for manufacturing of special kind of fabric providing an altogether different texture and feel.
UVW & Associates are the statutory auditors of Moon Ltd., a listed company, for the financial This kind of fabric has become a hit with retail customers. The company needs to set up plant
year 2022- 23. CA Udhav is the engagement partner for the audit assignment. He was of for manufacturing the above kind of fabric involving huge capital outlays to stay competitive in
the understanding that as per the requirement of one of the SAs he has a responsibility to the market.
communicate following matters to those charged with governance: You are auditor of the company and find that company’s revenue has increased in financial year
(a) The auditor’s responsibilities in relation to the financial statement audit. 2022-23 to ₹ 1000 crore from ₹ 750 crore in last year. By the time, you started the audit, there
(b) Planned scope and timing of the audit. was no change in plant capacity and information regarding need to set up new plant has become
known to you during inquiry of company’s personnel.
(c) Auditor independence
Discuss, how you should proceed to deal with above situation, as auditor of the company, paying
Which of the matters is not included in the list prepared by CA Udhav. Discuss such matter in
special attention to risk of material misstatement due to fraudulent financial reporting?
detail.
Answer 10
Answer 9
The given situation highlights need for the company to set up new plant for manufacturing of special
SA 260 “Communication with Those Charged with Governance” deals with auditor’s responsibility to
kind of fabric to stay competitive in the market. Setting up of such plant involves huge capital outlays
communicate with those charged with governance in relation to an audit of financial statements. Among
which could entail financing arrangements. Therefore, excessive pressure exists for management to be
various matters as included by CA Udhav in his list, one of the matters that is not mentioned in the list
involved in fraudulent financial reporting. In such a situation, management may be tempted to inflate
is Significant findings from the audit. With respect to such matter, the auditor shall communicate with
its revenues to show rosy picture. It is a fraud risk factor and needs to be evaluated by the auditor.
those charged with governance: -
The revenues of company have jumped from ₹ 750 crore in last year to ₹ 1000 crore in year 2022-
(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
23 without any change in plant capacity. The auditor may consider abovesaid fraud risk factor for
including accounting policies, accounting estimates and financial statement disclosures. When
assessing risk of material misstatement due to fraud.
applicable, the auditor shall explain to those charged with governance why the auditor considers
a significant accounting practice, that is acceptable under the applicable financial reporting In case of auditor assessing risk of material misstatement due to fraudulent financial reporting, audit
framework, not to be most appropriate to the particular circumstances of the entity; procedures to address such risk like performing substantive analytical procedures relating to revenue,
use of computer assisted audit techniques to identify unusual revenue transactions and testing controls
(b) Significant difficulties, if any, encountered during the audit;
pertaining to revenue transactions need to be performed.
(c) Unless all of those charged with governance are involved in managing the entity: -
(i) Significant matters arising during the audit that were discussed, or subject to correspondence,
with management;
(ii) Written representations the auditor is requesting
(d) Circumstances that affect the form and content of the auditor’s report, if any and
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Question 11 In the instant case, notice has been served upon the company by DGGI for allegedly creating fictitious
CA. Ridhima, internal auditor of Track Store Limited, has pointed out following deficiencies in invoices in guise of providing “marketing and sales services ₹50 crores. Issuing an invoice without
internal control of the company, in her reports: - supply of services is a serious offence under GST laws and it could involve penalties and imprisonment.
Such suspected non-compliance may have a direct effect on financial statements.
(i) Receivables are not reconciled at stipulated intervals.
The matter has also been informed to regulator i.e. IRDAI. Violation of IRDAI regulations may result
(ii) Customers are provided a credit limit based upon their track record. However, no review of
in fines, litigation or other consequences for the entity that may have a material effect on the financial
customer credit limits is undertaken at required intervals.
statements.
The statutory auditor of the company finds that no action has been taken by the company on the
If the auditor becomes aware of information concerning an instance of non-compliance or suspected
said deficiencies pointed out in reports of internal auditor.
noncompliance with laws and regulations, the auditor shall obtain: -
What does above situation allude to statutory auditor of company?
a) An understanding of the nature of the act and the circumstances in which it has occurred and
Answer 11
b) Further information to evaluate the possible effect on the financial statements.
Management failing to remedy known significant deficiencies in internal control on a timely basis is
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with management
a fraud risk factor for misstatements arising from fraudulent financial reporting.
and, where appropriate, those charged with governance. If management or, as appropriate, those charged
When management does not correct significant deficiencies in internal control on a timely basis, it with governance do not provide sufficient information that supports that the entity is in compliance with
reflects an attitude, character or set of ethical values that allow them knowingly and intentionally to laws and regulations and, in the auditor’s judgment, the effect of the suspected non-compliance may be
commit a dishonest act. material to the financial statements, the auditor shall consider the need to obtain legal advice.
Failure to rectify known control deficiencies pertaining to reconciliation of receivables and review If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate
of customer credit limits has the potential to fraud. Lack of timely reconciliation of receivables may the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
lead to intentional misstatements. Further, non-reviewing customer limit may lead to grant of credit
beyond creditworthiness of customers. It may result in intentional tying up of company’s funds with
risky customers due to collusion. Question 13
The above situation is a fraud risk factor for fraudulent financial reporting. CA. Vallabh Sundar is auditor of a leading private sector bank. “IT Systems and controlsi”s
under his consideration to be reported as “Key audit matter”in audit report of the bank due to
high level of automation and complexity of the IT architecture and its impact on the financial
Question 12 reporting system. At what time he should communicate such identified “Key audit matter”?
FAS Insurance Brokers Limited is a leading online insurance intermediary. During the year, What are relevant considerations in this regard and their usefulness?
Director General of GST Intelligence (DGGI) has issued notice to the company for allegedly Answer 13
creating fictitious invoices for “marketing and sales services” amounting to ₹ 50 crores in favor
SA 260 requires the auditor to communicate with those charged with governance on a timely basis.
of non-life insurance companies. The premises of company were also searched during the year
by DGGI officials. The matter was also informed to IRDAI by DGGI for violation of norms and SA 701 states that the appropriate timing for communications about key audit matters will vary with
regulations in this regard. the circumstances of the engagement. However, the auditor may communicate preliminary views
about key audit matters when discussing the planned scope and timing of the audit, and may further
Does above situation has any bearing on your responsibilities as statutory auditor of the
discuss such matters when communicating about audit findings. Doing so may help to alleviate the
company?
practical challenges of attempting to have a robust two- way dialogue about key audit matters at the
Outline briefly in context of possible non-compliance with laws by the company. time the financial statements are being finalized for issuance.
Answer 12 Communication with those charged with governance enables them to be made aware of the key audit
When the auditor becomes aware of the existence of or has information about investigations by matters that the auditor intends to communicate in the auditor’s report, and provides them with an
government departments and regulatory organizations, it may be an indication of non- compliance opportunity to obtain further clarification where necessary. The auditor may consider it useful to
with laws and regulations. provide those charged with governance with a draft of the auditor’s report to facilitate this discussion.
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Communication with those charged with governance recognizes their important role in overseeing Integrated Case Scenario
the financial reporting process, and provides the opportunity for those charged with governance to
CA. Biswajit is conducting audit of “Have More Limited. “He is auditor of the company since
understand the basis for the auditor’s decisions in relation to key audit matters and how these matters
last three years and has found nothing unusual in operations and financial statements of the
will be described in the auditor’s report. It also enables those charged with governance to consider
company. The company has many locations where substantial inventories are stored and lying.
whether new or enhanced disclosures may be useful in light of the fact that these matters will be
During his fourth-year stint, he finds that inventory quantities have risen disproportionately as
communicated in the auditor’s report.
compared to past few years trends. He has assessed existence of risk of material misstatement
due to fraud.
Question 14 The company has revenue of ` 750 core during the year. He has deeply verified all aspects
pertaining to revenue recognition of the company and has concluded that there is no risk of
Four audit firms viz. GPR & Co., MKS & Co., CY & Associates and DES & Associates have
material misstatement due to fraud related to revenue recognition.
been appointed for conducting statutory audit of KNB Bank, a public sector bank in accordance
with regulatory guidelines. During the course of audit, it has come to his knowledge that company is also required to install
online air pollution control monitoring systems in its plant as mandated in state pollution control
The professional work was divided by audit firms on the basis of zones of bank. However, work
legislation and regulations. Non-installation of such online air pollution control monitoring
relating to “IT Systems and controls” was not allocated by them due to its very nature.
systems may lead to fines and even sealing of plant.
While planning for the above common work area, it was decided to test IT general controls,
While verifying pay roll data of the company, it has come to notice that provisions of law
application controls and IT dependent manual controls. Planned key audit procedures relating
preventing employment of child labour are not being adhered to and company is employing
to this common area also included testing design and operating effectiveness of controls over
child labour in flagrant violation of rules in this regard. The company also exports part of
“computer operations including back-up, batch-processing and data center security”.
its turnover and matter has gone unnoticed in compliance audits carried out by agencies of
The actual audit procedures pertaining to “testing controls over batch processing” were overseas buyers.
performed by team of DES & Associates. In case work in relation to above audit procedures is
On the basis of above, answer the following questions
not performed professionally by DES & Associates, discuss where responsibility for such lapses
would lie in line with SA 299? 1. Considering description of disproportionate rise in inventory quantities, h of the following is
not likely to be an appropriate response to outlined assessed risk of material misstatement due
Answer 14
to fraud?
In respect of common areas, the joint auditors are only responsible for appropriateness of nature,
(a) Observing inventory counts at all locations at same date by employing necessary resources.
timing and extent of planned audit procedures agreed among them. The responsibility of individual
execution lies with concerned joint auditor. (b) Observing inventory counts at certain locations after prior intimation.
In the instant case, audit procedures relating to testing design and operating effectiveness of controls (c) More rigorous examination of packed items during observing inventory count process.
over computer operations including back-up, batch-processing and data center security have been (d) Observing inventory count at end of reporting period to minimize risk of manipulation.
planned jointly as it is a common area.
Ans: (b)
However, audit procedures relating to testing controls over batch processing were actually performed
by team of DES & Associates although these were planned jointly. In case of any lapses in performing
such procedures, DES & Associates would be responsible. 2. It has been concluded by auditor that there is no risk of material misstatement due to fraud
related to revenue recognition. Which of the following statements is most appropriate I respect?
(a) The auditor needs to document reasons for arriving at conclusion that there is no risk of material
misstatement due to fraud related to revenue recognition.
(b) Identified and assessed risks of material misstatement due to fraud need to be documented. Since
no risk of material misstatement due to fraud pertaining to revenue recognition was identified,
separate documentation in this respect is not needed.
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(c) The auditor needs only to document that no risk of material misstatement due to fraud relating to
revenue recognition was identified.
(d) The auditor needs to give reference to discussion among engagement team members to document
that no risk of material misstatement due to fraud relating to revenue recognition was identified.
Ans: (a)
3. Which of the following statements most appropriately describes receptibilities of auditor in

relation to compliance with state pollution control legislation and regulations?
(a) Sufficient appropriate evidence needs to be obtained by auditor to verify compliance.
(b) physical verification of workability of such systems is required from an auditor.
(c) Only inquiry of company management personnel and review of correspondence with regulatory
authorities are suffice to verify compliance.
(d) Only physical verification of workability of such systems and review of correspondence with
regulatory authorities are suffice to verify compliance.
Ans: (c)
4. The auditor has observed no-compliance of law prohibiting employment of child labor. Which
is the most appropriate course of action for him to proceed in this matter?
(a) He should obtain further information to evaluate the possible effect on financial statements.
(b) He must report the matter to concerned government department.
(c) He should obtain further information to evaluate the possible effect on financial statements.
Besides, he should evaluate implications of non-compliance for audit risk assessment.
(d) He should express a modified opinion in audit report.
Ans: (c)
5. Which of the following statements is most appropriate about documentation of- noncompliance
with laws and regulations by an auditor in context of SA 250?
(a) Instances of identified non-compliance with laws and regulations need to be documented.
(b) Instances of suspected non-compliance with laws and regulations need to be documented.
(c) Instances of non-compliance with laws and regulations finally determined by Courts of law need
to be documented.
(d) Instances of identified as well as suspected non-compliance with laws and regulations need to be
documented.
Ans: (d)
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GENERAL AUDITING PRINCIPLES AND AUDITOR’S RESPONSIBILITIES
CA Harshad Jaju
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3
AUDIT PLANNING,
STRATEGY &
CHAPTER EXECUTION
SA 210 – Agreeing the Terms of

Audit Engagements
Question 1
Sudharma Limited is a listed company having its operation across India. Sudharma Limited
appointed Mr. S, Mr. D and Mr. M, as its joint auditors for the year 2019-20. After making
sure that all of them are qualified to be appointed as statutory auditor, Sudharma Limited
issued engagement letter to all of them. But Mr. S was not clear on some points, so he requested
Sudharma Limited to slightly change the terms of his engagement. This change will not impact
the ultimate opinion on the financial statement. The engagement letter contains the details
on objective and scope of audit, responsibilities of auditor and identification of framework
applicable. It also contains the reference to expected form and content of report from all three
joint auditors. In your opinion what was the discrepancy in the Audit engagement letter issued
by Sudharma Limited? (MTP 4 Marks Nov 21 & Sep ’22, RTP Nov 20)
Answer 1
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, Sudharma Limited appointed Mr. S, Mr. D and Mr. M, as its joint auditors for the
year 2019-20 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
CA Harshad Jaju
98812 92971
AUDIT PLANNING, STRATEGY & EXECUTION AUDIT PLANNING, STRATEGY & EXECUTION
reference to expected form and content of report from all three joint auditors. However, engagement Mr. Ram during the course of audit. Further, company also imposed some limitation on scope
letter issued by Sudharma Ltd. does not specify the responsibilities of management, whereas as per of Mr. Ram.
SA 210, it should also specify responsibilities of management. What are the preconditions Mr. Ram should ensure before accepting/ refusing the proposal?
Also advise, whether Mr. Ram should accept the proposed audit engagement? (RTP Nov 19)
Question 2 Answer 3
AKJ Ltd. is a small-sized 30 years old company having business of manufacturing of pipes. As per SA 210 “Agreeing the Terms of Audit Engagements”, in order to establish whether the
Company has a plant based out of Dehradun and have their corporate office in Delhi. Recently preconditions for an audit are present, the auditor shall:
the company appointed new firm of Chartered Accountants as their statutory auditors. (a) Determine whether the financial reporting framework to be applied in the preparation of the
The statutory auditors want to enter into an engagement letter with the company in respect of financial statements is acceptable; and
their services but the management has contended that since the statutory audit is mandated by (b) Obtain the agreement of management that it acknowledges and understands its responsibility
law, engagement letter may not be required. Auditors did not agree to this and have shared a
(i) For the preparation of the financial statements in accordance with the applicable financial
format of engagement letter with the management for their reference before getting that signed.
reporting framework, including where relevant their fair presentation;
In this respect management would like to understand that as per SA 210 (auditing standard
referred to by the auditors), if the agreed terms of the engagement shall be recorded in an (ii) For such internal control as management determines is necessary to enable the preparation of
engagement letter or other suitable form of written agreement, what should be included in financial statements that are free from material misstatement, whether due to fraud or error;
terms of agreed audit engagement letter? (MTP 4 Marks, April 19, RTP May ’23, Old & New and
SM) (iii) To provide the auditor with:
Answer 2 a) Access to all information of which management is aware that is relevant to the preparation
As per SA 210 Agreeing the Terms of Audit Engagements The auditor shall agree the terms of the of the financial statements such as records, documentation and other matters;
audit engagement with management or those charged with governance, as appropriate. b) Additional information that the auditor may request from management for the purpose of
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other the audit; and
suitable form of written agreement and shall include: c) Unrestricted access to persons within the entity from whom the auditor determines it
(i) The objective and scope of the audit of the financial statements; necessary to obtain audit evidence.
(ii) The responsibilities of the auditor; Further, if management or those charged with governance impose a limitation on the scope of the
auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation
(iii) The responsibilities of management;
will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept
(iv) Identification of the applicable financial reporting framework for the preparation of the financial such a limited engagement as an audit engagement, unless required by law or regulation to do so.
statements; and
In addition, if the preconditions for an audit are not present, the auditor shall discuss the matter with
(v) Reference to the expected form and content of any reports to be issued by the auditor and a management. Unless required by law or regulation to do so, the auditor shall not accept the proposed
statement that there may be circumstances in which a report may differ from its expected form audit engagement.
and content.
In the instant case, Mr. Ram should not accept the appointment as statutory auditor of XYZ Private
Limited due to limitation imposed on his scope of work.
Question 3
Mr. Ram Kapoor, Chartered Accountant, has been appointed as the statutory auditor by XYZ
Private Limited for the audit of their financial statements for the year 2018-19. The company
has mentioned in the audit terms that they will not be able to provide internal audit reports to

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MULTIPLE CHOICE QUESTIONS (MCQS) Audit Plan, Audit Programme & Audit Strategy
M/s Sati and Associates were appointed as the statutory auditors of Power King Limited for the Entertainment Paradise, a movie theatre complex, is the foremost theatre located in Chennai.
audit of financial year 2021-22. Power King Limited has a power generating plant in Sikkim. Along with the sale of tickets over the counter and online booking, the major proportion of
At the time of accepting the engagement, it was decided among the engagement partner (CA income is from the cafe, shops, pubs etc. located in the complex. Its other income includes
Sati) and the management that since CA Sati and his team is doing the audit of a client having advertisements exhibited within/outside the premises such as hoardings, banners, slides, short
power plant in Sikkim for the first time, it will be the duty of the management to update the films etc. The facility for parking of vehicles is also provided in the basement of the premises.
audit team regarding all the taxes and statutes applicable to units situated in Sikkim. Which of Entertainment Paradise appointed your firm as the auditor of the entity. Being the head of
the following is correct in this regard? the audit team, you are, therefore, required to draw an audit programme initially in respect of
(a) The engagement team, being the auditor of Sikkim based power plant for the first time can always its revenue and expenditure considering the above-mentioned facts along with other relevant
rely on the management’s information and can work accordingly. points relating to a complex. (MTP 5 Marks, March 21 & March 22, New SM, PYP 5 Marks Nov
(b) The engagement team should understand the Power King Limited business environment and ’19, RTP May’18, Old & New SM)
should obtain knowledge about the laws and statutes applicable in this case. Answer 1
(c) The engagement team should not accept the audit of such power plant situated in Sikkim of which Audit Programme of Movie Theatre Complex:
he has no prior knowledge. A. Peruse the Memorandum of Association and Articles of Association of the entity.
(d) The engagement team can very well accept the audit of Power King Limited and with respect to B. Ensure the object clause permits the entity to engage in this type of business.
aspects related to Sikkim law he can give disclaimer of opinion, if required. (MTP 1 Mark March 22)
C. In the case of income from sale of tickets:
Ans: (b)
(i) Verify the control system as to how it is ensured that the collections on sale of tickets of
various shows are properly and accurately accounted.
Question 2 (ii) Verify the system relating to online booking of various shows and the system of realization of
A small concern has approached CA. Ajeet Nath for audit of accounts for year 2021-22. It later money.
on transpired that preparation of accounts of the concern was outsourced to a third party which (iii) Check that there is overall system of reconciliation of collections with the number of seats
was engaged in preparation of books of this concern on a cloud server and was also prepare ng available for different shows in a day.
financial statements. The discussion amongst partners regarding agreeing to audit engagement
D. Verify the internal control system and its effectiveness relating to the income from café, shops,
remained inconclusive. Which of the following statements is MOST APPROPRIATE regarding
pubs, game zone etc., located within the multiplex.
agreeing to audit engagement of small concern?
E. Verify the system of control exercised relating to the income receivable from advertisements
(a) The management is responsible for preparation of books and financial statements. If management
exhibited within the premises and inside the hall such as hoarding, banners, slides, short films etc.
is not willing to acknowledge it, audit engagement should not be accepted.
F. Verify the system of collection from the parking areas in respect of the vehicles parked by the
(b) The third party has prepared the books and financial statements. It should be acknowledged by
customers.
third party and then audit engagement should be accepted.
G. In the case of payment to the distributors verify the system of payment which may be either
(c) It is implied that management is responsible for preparation of books and financial statements.
through out right payment or percentage of collection or a combination of both. Ensure at the time
No express acknowledgment from management is necessary. Hence, audit engagement should be
of settlement, any payment of advance made to the distributor is also adjusted against the amount
accepted.
due.
(d) The management as well as third party should acknowledge joint responsibility for preparation of books
H. Verify the system of payment of salaries and other benefits to the employees and ensure that
and financial statements. Only then, audit engagement should be accepted. (MTP 1 Mark Oct 22)
statutory requirements are complied with.
Ans: (a)
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I. Verify the payments effected in respect of the maintenance of the building and ensure the same is of goods manufacture is not of sub-standard nature or leads to high scrappage work.
in order. (v) Assess whether personnel employed are properly trained and working efficiently.
J. Verify the insurance premium paid and ensure it covers the entire assets. (vi) See whether quality control techniques have been consistent or have undergone any change.
(vii) Examine inventory plans and procedures in report of transportation storage efficiency,
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: deterioration, pilferage and whether the same are audited regularly.
Audit Programme of Movie Theatre Complex: Majority of the Examinees wrote extremely (viii) Examine whether the basis adopted for calculating wastage for September is the same as was
good answer while a few Examinees gave irrelevant points about capital expenditure and other adopted for the other three months.
audit procedure besides various taxes and balance sheet item. (ix) Obtain a statement showing break up of wastage figures in storage, handling and process for the
four months under reference and compare the results of the analysis for each of the four months.
Question 2
In addition, some specific reasons for abnormal wastage in process may be considered by the
XY Ltd. is a manufacturing company, provided following details of wastages of raw materials
auditor are as under:
in percentage, for various months. You have been asked to enquire into causes of abnormal
wastage of raw materials. Draw out an audit plan. (i) Examine laboratory reports and inspection reports to find out if raw materials purchased were of
a poor quality or were of sub-standard quality. This will be most useful if it is possible to identify
Wastage percentage are
the wastage out of each lot that has been purchased.
July 2017 2.5%
(ii) Machine breakdown, power failure, etc. may also result into loss of materials in process. Check
Aug 2017 2.7% the machine utilization statements.
Sep 2017 2.4%
(iii) A high rate of rejections in the finished lots may also be responsible for abnormal wastage;
Oct 2017 8.1% (MTP 5 Marks April 18 & April 22) therefore, examine the inspectors’ reports in respect of inspection carried out on the completion
Or of each stage of work or process.
As an internal auditor for a large manufacturing concern, you are asked to verify whether (iv) It is possible that the wastage may have occurred because the particular lot out of which issues
there are adequate records for identification and value of Plant and Machinery, tools and dies were made was lying in the store for a long time, leading to deterioration in quality or because of
and whether any of these items have become obsolescent and not in use. Draft a suitable audit a change in the weather which may have led to the deterioration. Compare the wastage figures.
programme for the above. (MTP 5 Marks, April 18) (v) Abnormal wastage in storage and handling may arise due to the following reasons:
Answer 2 (1) Write offs on account of reconciliation of physical and book inventories: In case of periodical
Audit Plan to locate the Abnormal Wastage of Raw Material: To locate the reasons for the abnormal physical inventory taking, such write offs will be reflected only in the month such reconciliation
wastage, the auditor should first of all assess the general requirements as under: takes place.
(i) Procure a list of raw materials, showing the names and detailed characteristics of each raw (2) Accidental, theft or fire losses in storage: The auditor should examine the possibility of these
material. for the purpose.
(ii) Obtain the standard consumption figures, and ascertain the basis according to which normal (vi) Examine whether any new production line was taken up during the month in respect of which
wastage figures have been worked out. Examine the break-up of a normal wastage into that standard input-output ratio is yet to be set-up.
in process, storage and handling stages. Also obtain control reports, if any, in respect of OR
manufacturing costs with reference to predetermined standards.
The Internal Audit Programme in connection with Plant and Machinery and Tools and dies
(iii) Examine the various records maintained for recording separately the various lots purchased and may be on the following lines:
identification of each lot with actual material consumption and for ascertaining actual wastage
(i) Internal Control Aspects: The following may be incorporated in the audit programme to check
figures therein.
the internal control aspects-
(iv) Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality
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(a) Maintaining separate register for hired assets, leased asset and jointly owned assets. (xi) Review of R&D: To review R&D activity and ascertain the extent of its relevance to the
(b) Maintaining register of fixed asset and reconciling to physical inspection of fixed asset operations of the organization, maintenance of machinery efficiency and prevention of early
and to nominal ledger. obsolescence.
(c) All movements of assets are accurately recorded.

(d) Authorization be obtained for – Question 3
(1) a declaring a fixed asset scrapped. ‘The areas covered in comprehensive audit vary from enterprise to enterprise depending on the
nature of the enterprise, its objectives and operations.’ You are required to list down some of
(2) selling a fixed asset.
the broad areas to be examined in comprehensive audit. (MTP 4 Marks, April 18, RTP May 19)
(e) Check whether additions to fixed asset register are verified and checked by authorized person.
Answer 3
(f) Proper recording of all additions and disposal.
Areas to be Examined: The areas covered in comprehensive audit will naturally vary from enterprise
(g) Examining procedure for the purchase of new fixed assets, including written authority, to enterprise depending on the nature of the enterprise, its objectives and operations. Some of the
work order, voucher and other relevant evidence. broad areas are listed below-
(h) Regular review of adequate security arrangements. • Comparison of overall capital cost of the project with the approved planned costs.
(i) Periodic inspection of assets is done or not. • Production or operational outputs vis-à-vis underutilization of the installed capacity.
(j) Regular review of insurance cover requirements over fixed assets. • Systems of project formulation and implementation.
(ii) Assets Register: To review the registers and records of plant, machinery, etc. showing clearly • Planned rate of return.
the date of purchase of assets, cost price, location, depreciation charged, etc.
• Cost control measures.
(iii) Cost Report and Journal Register: To review the cost relating to each plant and machinery
• Research and development programmes.
and to verify items which have been capitalized.
• System of repairs and maintenance.
(iv) Code Register: To see that each item of plant and machinery has been given a distinct code
number to facilitate identification and verify the maintenance of Code Register. • Adequate purchase policies.
(v) Physical Verification: To see physical verification has been conducted at frequent intervals. • Effective and economical procedures.
(vi) Movement Register: To verify (a) whether Movement Register for movable equipment’s and • Project planning.
log books in case of vehicles, etc. are being maintained properly. • Undue waste, unproductive time for men and machines, wasteful utilization or even non- utilization
(vii) Assets Disposal Register: To review whether assets have been disposed off after proper of resources.
technical and financial advice and sales/disposal/retirement, etc. of these assets are governed by
authorization, sales memos or other appropriate documents.
Question 4
(viii) Spare Parts Register: To examine the maintenance of a separate register of tools, spare parts
Mr. S & Mr. J are a senior and junior articled assistant respectively, in a renowned audit firm.
for each plant and machinery.
Both were assigned statutory audit of a manufacturing company. Mr. S instructed his junior
(ix) Review of Maintenance: To scrutinize the programme for an actual periodical servicing and to draft an audit plan by taking reference from a similar client (a partnership f irm) who was
overhauling of machines and to examine the extent of utilization of maintenance department engaged in the same business. Mr. J was confused as to how that reference could suit in this case,
services. since the nature and extent of planning would vary for both clients. After few days, the audit
(x) Review of Obsolescence: To scrutinize whether expert’s opinion have been obtained from time work commenced. During the course of the audit, certain events took place, which made Mr.
to time to ensure purchase of technically most useful efficient and advanced machinery after a J to rethink about the audit plan initially designed. He approached Mr. S and enquired about
thorough study. when would an audit plan require a change. Comment about both the situations face by Mr. J
in the above situation. (MTP 5 Marks Oct 21)
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Answer 4 (iii) criteria used by the same entity or other entities in similar activities or programmes.
SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance (iv) independent expert opinion and know how.
with Standards on Auditing” states that in order to achieve the overall objectives of the audit, the (v) new or established scientific knowledge and other reliable information.
auditor shall use the objectives stated in relevant SAs in planning and performing the audit. Without
a careful plan, the overall objective of an audit may not be achieved. The audit planning is necessary (vi) general management and subject matter literature and research papers.
to conduct an effective audit, in an efficient and timely manner. So far as the nature of planning is
concerned, it would vary according to-
Question 6
(i) Size and Complexity of the Auditee - If the size and complexity of organization of which a u d
(a) Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation,
i t is to be conducted is large, then much more planning activities would be required as compared
Testing and Reporting. Explain. (RTP Nov’18)
to an entity whose size and complexity is small.
Answer 6
(ii) Past Experience & Expertise - The key engagement team members’ previous experience &
expertise also contributes towards variation in planning activities. (a) Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation,
Testing and Reporting.
(iii) Change in Circumstances - Another factor contributing towards variation in planning activities
is change in circumstances.
Risk and
Changes to Audit Planning: The auditor should update and change the overall audit strategy and Execution
Control Testing Reporting
audit plan as necessary during the course of the audit. The auditor may need to modify the overall Planning
Evaluation
audit strategy and audit plan due to the factors such as (i) result of unexpected events, (ii) changes in
conditions, or (iii) the audit evidence obtained from the results of audit procedures.
Image showing Stages of Audit Execution
Further, the auditor would also have to modify the nature, timing & extent of further audit procedures,
based on the revised considerations of assessed risks. This may be the case when information coming 1. Execution Planning: Prior to commencement of an audit engagement, it is important to lay down
to the auditor differs significantly from the information when he planned the audit process. the roadmap for audit execution to ensure timely and quality audit results. The auditors need
to plan their work in order to carry out the audit in an effective, efficient and timely manner. A
In addition to the above, there may be possibilities of change in law, notifications, government policies,
detailed audit program is prepared laying down the audit objectives, scope and audit approach.
which warrants updating of overall audit strategy and audit plan.
The manpower requirement, audit team qualifications, and the time element, etc. are some of the
important considerations during execution planning. In order to plan effectively, the auditor may
Question 5 need some more information about the audit area. A preliminary survey would help in gathering
You have been appointed as auditor of ARHAM Ltd. After having determined the audit the required information.
objectives, now you have been requested to draft audit criteria. What are the sources that you 2. Risk and Control Evaluation: For each segment of audit, the auditors should conduct a detailed
will use while doing the task? (MTP 5 Marks Oct 21) risk and control assessment i.e. list the risks that must be reviewed in that segment, capture for
Answer 5 each risk the controls that exist or those that are needed to protect against the risk and show for
each control, the work steps required to test the effectiveness of the controls. While making Risk
Determining Audit Criteria - Audit criteria are the standards used to determine whether a program & Control assessment it is necessary to borne in mind Materiality levels as the same is linked with
meets or exceeds expectations. It provides a context for understanding the results of the audit. Audit Audit Risks.
criteria are reasonable and attainable standards of performance against which economy, efficiency and
effectiveness of programmes and activities can be assessed. 3. Testing: Once a comprehensive understanding is gained of the key risks and the controls to be
evaluated in a given audit area, the auditors should test the operating effectiveness of the controls
The audit criteria may be sought to be obtained from the following sources: to determine whether controls are operating as designed. There are multiple test methods which
(i) procedure manuals of the entity. can be used to arrive at the conclusions on the effectiveness of the controls
(ii) policies, standards, directives and guidelines.
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4. Reporting: SA 700, “Forming an Opinion and Reporting on Financial Statements” establishes Question 8
standards on the form and content of the auditor’s report issued as a result of an audit performed A professional accountant is often required to give certificates or report for special purposes
by an auditor of the financial statements of an entity. The auditor should review and assess the required by various authorities and statute and he needs to take careful evaluation of such
conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion engagement. However, issuing such special purpose certificates or reports has some inherent
on the financial statements. This review and assessment involves considering whether the financial limitations which could limit his review and evaluation. Enumerate some of the limitations
statements have been prepared in accordance with an acceptable financial reporting framework associated with such special purpose report or certificates. (PYP 5 Marks, May ‘19)
applicable to the entity under audit. It is also necessary to consider whether the financial statements
Answer 8
comply with the relevant statutory requirements such as compliance of Provisions & Enactments
of the Company Law, Accounting Standards framed by ICAI, latest Guidelines etc. Inherent Limitations: A practitioner is expected to provide either a reasonable assurance (about
whether the subject matter of examination is materially misstated) or a limited assurance (stating that
The auditor’s report should contain a clear written expression of opinion on the financial statements
nothing has come to the practitioner’s attention that causes the practitioner to believe that the subject
taken as a whole. A measure of uniformity in the form and content of the auditor’s report is
matter is materially misstated) since it is difficult to reduce engagement risk to zero due to inherent
desirable because it helps to promote the reader’s understanding of the auditor’s report and to
limitations of the audit. The inherent limitations could arise from:
identify unusual circumstances when they occur. A statute governing the entity or a regulator may
require the auditor to include certain matters in the audit report or prescribe the form in which the (i) the nature of financial reporting;
auditor should issue his report. (ii) the use of selective testing;
5. Other Important Considerations: In addition to above, there are certain other consideration (iii) the inherent limitations of internal controls;
which auditor is required to take care while executing the audit such as using the work of other
(iv) the fact that much of the evidence available to the practitioner is persuasive rather than conclusive;
auditor, using the work of an auditor’s expert etc.
(v) the nature of procedures to be performed in a specific situation;
(vi) the use of professional judgment in gathering and evaluating evidence and forming conclusions
Question 7
based on that evidence;
Write a short note on : Contents of an audit plan. (RTP Nov 20)
(vii) in some cases, the characteristics of the underlying subject matter when evaluated or measured
Answer 7 against the criteria; and
Contents of an Audit Plan: The auditor shall develop an audit plan that shall include a description of- (viii) the need for the engagement to be conducted within a reasonable period of time and at a reasonable
(i) The nature, timing and extent of planned risk assessment procedures, as determined under SA 315 cost.
“Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity Therefore, whenever a practitioner is required to give a “certificate” or a “report” for special purpose,
and Its Environment”. the practitioner needs to undertake a careful evaluation of the scope of the engagement, i.e., whether
(ii) The nature, timing and extent of planned further audit procedures at the assertion level, as the practitioner would be able to provide reasonable assurance or limited assurance on the subject
determined under SA 330 “The Auditor’s Responses to Assessed Risks”. matter.
(iii) Other planned audit procedures that are required to be carried out so that the engagement complies
with SAs.
Inherent Limitations: Examinees exhibit lack of understanding of the question and failed to answer
The audit plan is more detailed than the overall audit strategy that includes the nature, timing and
the same correctly.
extent of audit procedures to be performed by engagement team members. Planning for these audit
procedures takes place over the course of the audit as the audit plan for the engagement develops.
For example, planning of the auditor’s risk assessment procedures occurs early in the audit process.
However, planning the nature, timing and extent of specific further audit procedures depends on the
outcome of those risk assessment procedures. In addition, the auditor may begin the execution of
further audit procedures for some classes of transactions, account balances and disclosures before
planning all remaining further audit procedures.
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Question 9 MULTIPLE CHOICE QUESTIONS (MCQS)

CA. Raj is the auditor of a multiplex cinema house. He has observed during the course of the Question 1
audit, that the existing venue has undergone renovation. The auditorium was split into smaller
BVM & Associates is an audit firm that employs large number of audit assistants. CA Mahesh,
ones and additional auditoriums were constructed. CA. Raj, who finalised the audit plan and
a partner pays extreme attention to briefing the audit assistants every day while the audit is
audit programme wanted to reconsider the same during the course of the audit. Discuss a few
continuing. All audit assistants are required to document their notes in the daily briefing and
circumstances where the audit programme would have to be suitably altered by the auditor.
accordingly conduct the audit.
(PYP 4 Marks Nov 22)
CA Mahesh has made it very clear that any assistant who does not document the notes taken
Answer 9
and the steps taken accordingly will be reprimanded as it will mean that the assistants are
In the given case of multiplex cinema house, CA Raj observed that existing venue undergone renovation, not creating their audit programmes on the job. The practice deployed by CA Mahesh can be
being split into smaller ones and additional auditoriums were constructed. Since CA Raj developed termed as?
the audit program keeping in view a multiplex cinema house but during the audit, circumstances have
(a) Unacceptable as CA Mahesh being the auditor should be providing the audit programme and he
changed significantly and hence CA Raj should suitably alter the audit program.
cannot expect the team to take daily notes instead of performing the audit.
Given below are a few circumstances where in the audit programme would have to be suitably altered:
(b) Appropriate and in line with SA 230 as the audit programme must be prepared on the basis of
(1) If the audit procedures were designed for a certain volume of turnover and subsequently the documentation of auditor’s briefing notes.
volume have substantially increased. Also, when there have been significant changes in the
(c) Acceptable but incomplete as CA Mahesh has not given any audit programme to the audit assistants
accounting organisation, procedures and personnel subsequent to the audit procedures.
to follow.
(2) Where during the course of an audit, it has been discovered that internal control procedures were
(d) Inappropriate as CA Mahesh should not only provide the audit programme but also make sure that
not as effective as assumed at the time the audit programme was framed.
audit programme is formally approved by all partners of the firm. (MTP 2 Marks, Mar 19)
(3) Where there has been an extraordinary increase in the amount of book debts or that in the value of
Ans: (c)
stocks as compared to that in the previous year.
(4) When a suspicion has aroused during the course of audit or information has been received that
assets of the company have been misappropriated. Question 2
It may be noted that the audit plan and related programme should be reconsidered as the audit CA Sameer, after developing the audit strategy for Menka Ltd., develops an audit plan but finds
progresses. Such re-consideration is based on the auditor’s review of internal control, his preliminary a need to revise the materiality levels set earlier and therefore a deviation from the already set
evaluation thereof and the result of his compliance and substantive procedures. audit strategy is felt necessary. In this case, he should
(a) Continue with the Audit Plan without considering the Audit Strategy
(b) Drop the audit and withdraw from the engagement
(c) First Modify the audit strategy and thereafter prepare the audit plan according to the modified
strategy.
(d) Devise a new audit plan and then, change the strategy as per the Revised Plan. (MTP 1 Marks, Oct
19)
Ans: (c)

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SA 600 – Using the Work of Another Auditor Answer 2
Question 1 Factors to be considered while accepting the position of Principal auditor -
Seeta Ltd is the Subsidiary Company of Geeta Ltd. Ram & Associates has been appointed SA 600 – Using the work of Another Auditor -
as auditor of Geeta Ltd. for the financial year 2019-20 and Hanuman & Associates has been While accepting the position of Principal Auditor, the auditor should consider whether the auditor’s
appointed as auditor of Seeta Ltd. for the year 2019-20. Explain the role of Ram & Associates and own participation is sufficient to be able to act as the principal auditor.
Hanuman & Associates as auditors of the parent company and subsidiary company respectively.
For this purpose, the auditor would consider:
(MTP 4 Marks March ’23, MTP 4 Marks, Oct 20)
(a) the materiality of the portion of the financial information which the principal auditor audits;
Answer 1
(b) the principal auditor’s degree of knowledge regarding the business of the components;
Role of Auditor in case of Parent Company and Subsidiary Company: As per SA 600 “Using the
Work of Another Auditor”, there should be sufficient liaison between the principal auditor (hereinafter (c) the risk of material misstatements in the financial information of the components audited by the
referred as auditor of Parent Company and the other auditor (hereinafter referred as auditor of other auditor; and
Subsidiary Company). (d) the performance of additional procedures as set out in this SA regarding the components audited
Role of Principal Auditor (Ram & Associates- Auditor of Parent Company): by other auditor resulting in the principal auditor having significant participation in such audit.
(i) It is necessary to issue written communication(s) as a principal auditor to the other auditor.
(ii) The principal auditor should advise the other auditor of any matters that come to his attention that EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
he thinks may have an important bearing on the other auditor’s work. Even though examinees correctly referred to SA 600 but majority of them misunderstood the
(iii) When considered necessary by him, the principal auditor may require the other auditor to answer question and wrongly discussed on the areas for relying on the work of other auditor instead of
a detailed questionnaire regarding matters on which the principal auditor requires information for explaining the factors to be considered while accepting the position of Principal Auditor.
discharging his duties.
Question 3
Role of Other Auditor (Hanuman & Associates- Auditor of Subsidiary Company):
CA H was appointed as a Statutory Auditor of MNL Limited, a listed company, which has
(i) The other auditor, knowing the context in which his work is to be used by the principal auditor, three subsidiaries namely M Ltd., N Ltd., L Ltd. and also 15 branches across India. Auditors
should co-ordinate with the principal auditor. For example, by bringing to the principal auditor’s are duly appointed for the subsidiaries and branches as well. With regard to the determination
immediate attention to any significant findings requiring to be dealt with at entity level, adhering of materiality during the audit of consolidated financial statements, what should be the
to the time-table for audit of the component, etc. considerations of CA H?
(ii) He should ensure compliance with the relevant statutory requirements. How he should deal in his report if there are observations (for instance modification and/or
(iii) The other auditor should respond to the questionnaire sent by Principal Auditor on a timely basis. emphasis of matter in accordance with SA 705/706) made by component auditors? (PYP 5
Marks May ‘22)
Answer 3
Question 2
CA. H should consider the requirement of SA 600, “Using the Work of Another Auditor”, if he decides
PQ Limited, a listed entity, headquartered in Mumbai and is having 15 branches all over India.
to use the work of another auditor in relation to the audit of consolidated financial statements and he
The Company is in the business of buying paddy grown by farmers directly and processing
should comply with the requirements of SA 600.
to produce final products for selling in domestic as well as international markets. PQ Limited
appointed four firms of Chartered Accountants for audit of its head office and branches. Your In carrying out the audit of the standalone financial statements, the computation of materiality for the
firm is one of those firms. It was agreed that your firm will act as Principal auditor. ‘What purpose of issuing an opinion on the standalone fi nancial statements of each component would be
factors will be considered by you while accepting the position of Principal auditor ? (PYP 5 done component-wise on a standalone basis.
Marks July 21) However, with regard to determination of materiality during the audit of consolidated financial
statements (CFS), the auditor should consider the following:
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(i) The auditor is required to compute the materiality for the group as a whole. This materiality (1) advise the other auditor of the use that is to be made of the other auditor’s work and report and
should be used to assess the appropriateness of the consolidation adjustments (i.e. permanent make sufficient arrangements for co-ordination of their efforts at the planning stage of the audit.
consolidation adjustments and current period consolidation adjustments) that are made by the The principal auditor would inform the other auditor of matters such as areas requiring special
management in the preparation of CFS. consideration, procedures for the identification of inter-component transactions that may require
(ii) The parent auditor can also use the materiality computed on the group level to determine whether disclosure and the time-table for completion of audit; and
the component’s financial statements are material to the group to determine whether they should (2) advise the other auditor of the significant accounting, auditing and reporting requirements and
scope in additional components, and consider using the work of other auditors as applicable. obtain representation as to compliance with them.
(iii) The principal auditor also computes materiality for each component and communicates to the The principal auditor might discuss with the other auditor the audit procedures applied or review
component auditor, if he believes is required for true and fair view on CFS. a written summary of the other auditor’s procedures and findings which may be in the form of a
However, while considering the observations (for instance modification and /or emphasis of matter completed questionnaire or check-list. The principal auditor may also wish to visit the other auditor.
in accordance with SA 705/706) of the component auditor in his report on the standalone financial The nature, timing and extent of procedures will depend on the circumstances of the engagement
statements, the principles of SA 600 needs to be considered i.e. the parent auditor should comply with and the principal auditor’s knowledge of the professional competence of the other auditor. This
the requirements of SA 600, “Using the Work of Another Auditor”. knowledge may have been enhanced from the review of the previous audit work of the other auditor.
Further, SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality Control (SQC) 1,
“Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and
Question 4 Other Assurance and Related Services Engagements”, issued by the Institute, provides that, unless
B is the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8 Branch Auditors. B otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at
wanted to ensure that the works of Branch Auditors were adequate for the purpose of his audit. his discretion, make portions of, or extracts from, audit documentation available to clients, provided
Hence he insisted on Branch Auditors to get familiar with a check list he prepared for branches such disclosure does not undermine the validity of the work performed, or, in the case of assurance
and, besides, required them to share the working papers compiled by them for his review and engagements, the independence of the auditor or of his personnel.”
return. Is Principal Auditor within his right in asking for such sharing of working papers? (PYP In the light of aforesaid, principal auditor was not within his right for asking for such sharing of
5 Marks, May ’18) working papers. It depends upon the discretion of auditor.
Answer 4
Using the Work of Another Auditor: When the accounts of the branch are audited by a person
other than the company’s auditor, there is need for a clear understanding of the role of such auditor
and the company’s auditor in relation to the audit of the accounts of the branch and the audit of the
company as a whole; also, there is great necessity for a proper rapport between these two auditors
for the purpose of an effective audit. In recognition of these needs, the Council of the Institute of
Chartered Accountants of India has dealt with these issues in SA 600, “Using the Work of another
Auditor”. It makes clear that in certain situations, the statute governing the entity may confer a right
on the principal auditor to visit a component and examine the books of account and other records of
the said component, if he thinks it necessary to do so. Where another auditor has been appointed for
the component, the principal auditor would normally be entitled to rely upon the work of such auditor
unless there are special circumstances to make it essential for him to visit the component and/or to
examine the books of account and other records of the said component.
Further, it requires that the principal auditor should perform procedures to obtain sufficient appropriate
audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes, in
the context of the specific assignment. When using the work of another auditor, the principal auditor
should ordinarily perform the following procedures:
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MULTIPLE CHOICE QUESTIONS (MCQS) SA 610 – Using the Work of Internal Auditors
CA Ajay was appointed as the statutory auditor of TUV Ltd. at Delhi. TUV Ltd has a branch (Concept included in Chapter 16 Internal Audit)
office at Pune. A branch auditor, CA Suresh, was appointed to conduct the audit of the Pune
OPQ Ltd is in the software consultancy business. The company had large balance of accounts
branch of TUV Ltd. CA Ajay provided CA Suresh with a questionnaire regarding the details
receivables in the past years which have been assessed as area of high risk. For the year ended
of the branch office of certain specific accounts and balances to be filled in by CA Suresh in
31 March 2019, in respect of the valuation of accounts receivable, the statutory auditor was
which indication of material misstatements are involved. However, CA Suresh denied to fill such
assigned with the checking of accuracy of the aging of the accounts receivables and provision
questionnaire as he explained that CA Ajay, as the principal auditor has no such right. Which is
based on ageing, to the internal auditor providing direct assistance to him. Comment. (MTP 4
the relevant SA and which of the following course of action is correct in this regard?
Marks, Oct 19 & April 19, RTP May’19)
(a) SA 600 is the relevant SA; CA Ajay is correct in asking for information from CA Suresh through
Answer 1
a questionnaire.
As per SA 610 Using the Work of Internal Auditor, the external auditor (Statutory Auditor) shall not
(b) SA 610 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as a principal
use internal auditors to provide direct assistance to perform procedures that:
auditor can refer to branch auditor’s report or other branch records but cannot ask the branch
auditor to provide any specific information by filling a questionnaire. a. Involve making significant judgments in the audit;
(c) SA 600 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as CA Ajay b. Relate to higher assessed risks of material misstatement where the judgment required in performing
instead of asking CA Suresh to send the filled up questionnaire, should himself verify the specific the relevant audit procedures or evaluating the audit evidence gathered is more than limited;
branch details as indication of material misstatement is there. c. Relate to work with which the internal auditors have been involved and which has already been, or
(d) SA 610 is the relevant SA; CA Ajay should seek management’s permission before asking the will be, reported to management or those charged with governance by the internal audit function;
branch auditor for any information (MTP 1 Marks, Oct 20) or
Ans: (c) d. Relate to decisions the external auditor makes in accordance with this SA regarding the internal
audit function and the use of its work or direct assistance.
In the given case where the valuation of accounts receivable is assessed as an area of higher risk,
the statutory auditor could assign the checking of the accuracy of the aging to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision based
on the aging would involve more than limited judgment, it would not be appropriate to assign that
latter procedure to an internal auditor providing direct assistance.
Question 2
Moon Ltd. of which you are the Statutory Auditor, have an internal audit being conducted by
an outside agency. State the factors that weigh considerations in opting to make use of direct
assistance of the internal auditors for the purpose of statutory audit. (PYP 4 Marks, May ’18)
Answer 2
Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors Providing
Direct Assistance: SA 610 ‘Using the work of Internal Auditor’ Deals about the concept of direct
assistance of internal auditor. In determining the nature and extent of work that may be assigned
to internal auditors and the nature, timing and extent of direction, supervision and review that is
appropriate in the circumstances, the external auditor shall consider:
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(1) The amount of judgment involved in: (iv) Relate to decisions the external auditor makes in accordance with this SA regarding the internal
(i) Planning and performing relevant audit procedures; and audit function and the use of its work or direct assistance.
(ii) Evaluating the audit evidence gathered; Therefore, the amount of judgment involved, and the risk of material misstatement are also relevant
in determining the work that may be assigned to internal auditors providing direct assistance.
(2) The assessed risk of material misstatement; and
In the given situation of ABC Ltd., in circumstances where the valuation of accounts receivable is
(3) The external auditor’s evaluation of the existence and significance of threats to the objectivity and
assessed as an area of higher risk, the external auditor could assign the checking of the accuracy of
level of competence of the internal auditors who will be providing such assistance.
the aging to an internal auditor providing direct assistance.
If using internal auditors to provide direct assistance is not prohibited by law or regulation, and the
However, because the evaluation of the adequacy of the provision based on the aging would involve
external auditor plans to use internal auditors to provide direct assistance on the audit, the external
more than limited judgment, it would not be appropriate to assign that latter procedure to an internal
auditor shall evaluate the existence and significance of threats to objectivity and the level of competence
auditor providing direct assistance.
of the internal auditors who will be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the internal auditors’
objectivity shall include inquiry of the internal auditors regarding interests and relationships that may Question 4
create a threat to their objectivity. CA. Amboj, a practicing chartered accountant has been appointed as an internal auditor of
Textile Ltd. He conducted the physical verification of the inventory at the year-end and handed
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: over the report of such verification to CA. Kishor, the statutory auditor of the Company, for his
view and reporting. Can CA. Kishor rely on such report? (MTP 4 Marks, Oct 18)
Considerations in making use of direct assistance of Internal Auditors: Examinees answered
referring SA 610 but examinees failed to emphasize that external auditor shall evaluate the existence Answer 4
and significance of threats of objectivity of the internal auditors. Using the Work of Internal Auditor: As per SA 610 “Using the Work of Internal Auditors”, while
determining whether the work of the internal auditors can be used for the purpose of the audit, the
Question 3
external auditor shall evaluate-
(Concept Included in Chapter 16 Internal Audit)
(a) The extent to which the internal audit function’s organizational status and relevant policies and
ABC Ltd. is engaged in the business of trading and manufacturing of readymade garments. procedures support the objectivity of the internal auditors;
The company has large balances of accounts receivables as on March 31, 2022, which has been
(b) The level of competence of the internal audit function; and
assessed as the area of high risk in the audit planning stage. For the year ended March 31,
2022, in respect of the valuation of accounts receivables, the Statutory Auditor has assigned the (c) Whether the internal audit function applies a systematic and disciplined approach, including
checking of the accuracy of the ageing of the accounts receivables and provision made towards quality control.
doubtful receivables, to the internal auditor. Please advise the statutory auditor, the areas in Further, the external auditor shall not use the work of the internal audit function if the external auditor
which direct assistance from internal auditor cannot be taken. Also, comment in this scenario, determines that:
whether statutory auditor can take internal auditor’s assistance. (PYP 5 Marks Nov 22)
(a) The function’s organizational status and relevant policies and procedures do not adequately support
Answer 3 the objectivity of internal auditors;
Direct Assistance from Internal Auditor: As per SA 610 “Using the Work of Internal Auditor”, the (b) The function lacks sufficient competence; or
external auditor shall not use internal auditors to provide direct assistance to perform procedures that:
(c) The function does not apply a systematic and disciplined approach, including quality control.
(i) Involve making significant judgments in the audit;
In the instant case, CA. Kishor should ascertain the internal auditor’s scope of verification, area of
(ii) Relate to higher assessed risks of material misstatement where the judgment required in performing coverage and method of verification. He should review the report on physical verification taking into
the relevant audit procedures or evaluating the audit evidence gathered is more than limited; consideration these factors. If possible he should also test check few items and he can also observe the
(iii) Relate to work with which the internal auditors have been involved and which has already been, or procedures performed by the internal auditors.
will be, reported to management or those charged with governance by the internal audit function; or
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If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the report SA 620 – Using the Work of an Auditor’s Expert
but if he finds that the verification is not in order, he has to decide otherwise. The final responsibility
Question 1
to express opinion on the financial statement remains with the statutory auditor.
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors
MULTIPLE CHOICE QUESTIONS (MCQS) to conduct auditing for the financial year 2015-16. For the valuation of gratuity scheme of the
company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference
Question 1
of opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major
M/s Viaan Viraj & associates are the statutory auditors of ABC Ltd. for the FY 2019 -20. difference was found in the actuary reports. However, Mr. X agreed to Mr. Y’s actuary report,
The company has a strong internal control team. During the course of audit, CA Viaan, the though, Mr. Z did not. Mr. X contends that Mr. Y’s actuary report shall be considered in audit
engagement partner found that the company has factories all across the country. In order to report due to majority of votes. Now, Mr. Z is in dilemma.
verify the wages expenses at all the factories, CA Viaan decided to use the Internal Audit Team of
You are required to decide the responsibility of auditors Mr. X and Mr. Z, in case, report made
the company. He accordingly discussed the same with Mr. Gaurank, the Chief Internal Auditor
by Mr. Y’s actuary, later on, found faulty. (MTP 5 Marks, March 18 & April ’23, RTP Nov’18,
of ABC Ltd. to provide him a report on the wages expenses across all factories. Which of the
Old & New SM)
following requirements as per SA 610 are required to be fulfilled by CA Viaan prior to using the
direct assistance of the Internal Audit Team of the company? Answer 1
(a) CA Viaan should obtain written agreement from the management of ABC Ltd. that the internal Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”,
audit team will be allowed to follow the statutory auditors’ instructions. the expertise of an expert may be required in the actuarial calculation of liabilities associated with
insurance contracts or employee benefit plans etc., however, the auditor has sole responsibility for the
(b) CA Viaan should obtain written agreement from Mr. Gaurank that his team will keep the matters
audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work of an
confidential.
auditor’s expert.
(c) Both a & b
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
(d) CA Viaan can use the direct assistance of the Internal Audit Team after discussing the same with including the relevance and reasonableness of that expert’s findings or conclusions, and their
the management. No prior written agreement is required (MTP 1 Marks, Oct 20) consistency with other audit evidence as per SA 500.
Ans: (a) Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods, then
the relevance and reasonableness of those assumptions and methods must be ensured by the auditor and
if the expert’s work involves the use of source data that is significant to that expert’s work, the relevance,
completeness, and accuracy of that source data in the circumstances must be verified by the auditor.
In the instant case, Mr. A, Mr. B and Miss C, jointly appointed as an auditor of PRS Ltd., referred their
own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per SA 620.
Mr. B’s referred actuary has provided the gratuity valuation report, which later on found faulty.
Further, Miss C being not agreed with Mr. B’s report, submitted separate audit report specifically for
such gratuity valuation.
In such situation, it was duty of Mr. A, Mr. B and Miss C, before using the gratuity valuation report
of Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They were
also required to examine the relevance, completeness and accuracy of source data used for such report
before expressing their opinion.
Mr. A and Mr. B will be held responsible for grossly negligence and using such faulty report without
examining the adequacy of expert actuary’s work whereas Miss C will not be held liable for the same
due to separate opinion expressed by her.

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Question 2 their expert. Hence, there is no need to raise a question on the objectivity of Mr. Sheetal or on
X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them. his work performed for the company. However, the audit partner was of the opinion that the
The company had various derivative contracts – options, forward contracts, interest rate swaps audit team needs to evaluate the objectivity of an expert engaged by the entity, irrespective
etc. which were required to be fair valued for which company got the fair valuation done through of the fact that he was appointed as an independent expert. Kindly guide the audit partner
an external third party. The statutory auditors of the company involved an auditor’s expert to and Mr. Shreyansh with respect to requirements pertaining to evaluating the objectivity of the
audit valuation of derivatives. Auditor and auditor’s expert were new to each other i.e. they management expert. (RTP Nov ’23)
were working for the first time together but developed a good bonding during the course of the Answer 3
audit . The auditor did not enter into any formal agreement with the auditor’s expert. Please As per SA 500 “Audit Evidence”, when information to be used as audit evidence has been prepared
advise. (5 Marks Oct 18, MTP 5 Marks, Mar 19 & March ’21, RTP May’19, RTP May’23, Old using the work of a management’s expert, the auditor shall, to the extent necessary, have regard to the
& New SM) significance of that expert’s work for the auditor’s purposes evaluate the competence, capabilities and
Answer 2 objectivity of that expert.
As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the A broad range of circumstances may threaten objectivity, for example, self-interest threats, advocacy
auditor’s expert’s work may vary considerably with the circumstances, as may the respective roles threats, familiarity threats, self-review threats and intimidation threats. Safeguards may reduce such
and responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent of threats and may be created either by external structures (for example, the management’s expert’s
communication between the auditor and the auditor’s expert. It is therefore required that these matters profession, legislation or regulation), or by the management’s expert’s work environment (for
are agreed between the auditor and the auditor’s expert. example, quality control policies and procedures). Although safeguards cannot eliminate all threats
• In certain situations, the need for a detailed agreement in writing is required like - The auditor’s to a management expert’s objectivity, threats such as intimidation threats may be of less significance
expert will have access to sensitive or confidential entity information. to an expert engaged by the entity than to an expert employed by the entity, and the effectiveness
of safeguards such as quality control policies and procedures may be greater. Because the threat to
• The matter to which the auditor’s expert’s work relates is highly complex.
objectivity created by being an employee of the entity will always be present, an expert employed by
• The auditor has not previously used work performed by that expert. the entity cannot ordinarily be regarded as being more likely to be objective than other employees of
• The greater the extent of the auditor’s expert’s work, and its significance in the context of the the entity.
audit. When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss with
In the given case, considering the complexity involved in the valuation and volume of derivatives and management and that expert any interests and relationships that may create threats to the expert’s
also due to the fact that the auditor and auditor’s expert were new to each other, auditor should have objectivity and any applicable safeguards, including any professional requirements that apply to
signed a formal agreement/ engagement letter with the auditor’s expert in respect of the work assigned the expert; and to evaluate whether the safeguards are adequate. Interests and relationships creating
to him. threats may include:
• Financial interests.
• Business and personal relationships.
Question 3
• Provision of other services.
Mr. Shreyansh, while performing the audit of Red Rock & Silver Sand Limited which was
involved in phosphorus mining, decided to appoint an auditor’s expert for the valuation of In the current case, Red Rock & Silver Sand Limited re-appointed Mr. Sheetal for this engagement as
environmental liabilities and site clean-up costs. Red Rock & Silver Sand Limited re- appointed an independent expert. The audit team was of the view that the objectivity of the independent expert
Mr. Sheetal as an independent expert for this engagement. For the last five years, management cannot be questioned just because he was appointed by management as their expert. However, the
has been reappointing Mr. Sheetal. Mr. Sheetal calculated the environmental liabilities audit partner had a contrary view.
pertaining to completed mining sites and the sites which will be discarded in the near future Hence, the audit team should evaluate the objectivity of an expert engaged by the entity as the threat
and a provision for clean-up costs. This provision was accepted by management. Mr. Shreyansh, to objectivity, created by being an employee of the entity, will always be present. An expert appointed
after performing the inquiries with management, was of the opinion that the objectivity of the by the entity cannot ordinarily be regarded as being more likely to be objective than other employees
independent expert cannot be questioned just because he was appointed by management as of the entity. As a result, audit partner is correct in his view.
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HAM Ltd. is engaged in the business of manufacturing of medicines. The manufacturing process State what may be the evaluative or review procedures that the Statutory Auditor may do before
requires raw materials such as hydrochloric acid, caustic soda and other chemicals for the concluding as to relevance and reasonableness of Auditor’s Expert work for using it for his
manufacturing of various drugs. The Company has maintained large stock of raw materials of audit purposes. (PYP 5 Marks, Nov ‘18)
all types of chemicals being used. The nature of raw material is such that its physical verification Answer 5
requires the involvement of an expert. Management hired their expert for the stock taking and
Evaluating the Adequacy of the Auditor’s Expert’s Work: As per SA 620 Using the work of an
auditors also involved their expert for the same purpose.
Auditor’s Expert, the auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s
The auditor observed that the work of the auditor’s expert was not adequate for the auditor’s purposes, including the relevance and reasonableness of that expert’s findings or conclusions, and
purposes and he could not resolve the matter through additional audit procedures which their consistency with other audit evidence, etc.
included further work performed by both the auditor’s expert and the auditor.
Specific procedure to evaluate the adequacy of the auditor’s expert’s work are –
Based on above, the auditor knows that it would be right to express a modified opinion in the
• Enquiries of the auditor’s expert.
auditor’s report because he has not obtained sufficient appropriate audit evidence. But he was
reluctant in doing so and issued a clean audit report and included the name of the expert in his • Reviewing the auditor’s expert’s working papers and reports
report to reduce his responsibility for the audit opinion expressed. • Corroborative procedure such as-
Comment with respect to relevant Standard of Auditing relating to the action of the auditor of (a) Observing the auditor’s expert’s work
issuing clean audit report. (PYP 5 Marks May ’23, MTP 5 Marks, April 19)
(b) Examining the published data, such as statistical reports from reputed source
Answer 4
(c) Confirming the relevant matters with third parties
As per SA 620, “Using the work of an Auditor’s Expert”, if the auditor concludes that the work of the
(d) Performing detailed analytical procedure to see whether principles of materiality aspects considered
auditor’s expert is not adequate for the auditor’s purposes and the auditor cannot resolve the matter
through the additional audit procedures, which may involve further work being performed by both (e) Re performing calculations
the expert and the auditor, or include employing or engaging another expert, it may be necessary to • Discussions with another expert with relevant expertise when, for example, the findings or the
express a modified opinion in the auditor’s report in accordance with SA 705 because the auditor has conclusion of the auditor’s expert are not consistent with other audit evidence.
not obtained sufficient appropriate audit evidence.
Discussing the expert’s report with the management
In addition, the auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing
an unmodified opinion unless required by law or regulation to do so. If such reference is required by
law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce Question 6
the auditor’s responsibility for the audit opinion. CA Dabu has been appointed as an auditor of M/s MAP Technocraft Ltd. to conduct statutory
If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such audit. While conducting audit, he came across some difficulties which the management could
reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall not explain to him properly and, therefore, he decided to take services of Mr. Jay, an engineering
indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that consultant. Mr. Jay performed his work and submitted details to CA Dabu. State the specific
opinion. In such circumstances, the auditor may need the permission of the auditor’s expert before procedure which CA Dabu should follow to evaluate the adequacy of work performed by Mr.
making such a reference. Jay. (PYP 5 Marks, May ‘19)
In the given case, the auditor cannot reduce his responsibility by referring the name of auditor’s expert Answer 6
and thereby issuing a clean report. The auditor should have issued a modified report and could have Evaluating the Adequacy of the Auditor’s Expert’s Work: As per SA 620 on “Using the Work of
given reference to the work of an auditor’s expert in that report if such reference was relevant to an Auditor’s Expert”, specific procedures to evaluate the adequacy of the auditor’s expert’s work for
understanding of a modification to the auditor’s opinion but even in that case the auditor should have the auditor’s purposes may include:
indicated in his report that such reference of an auditor’s expert does not reduce his responsibility for
(i) Inquiries of the auditor’s expert.
that opinion.
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(ii) Reviewing the auditor’s expert’s working papers and reports. MULTIPLE CHOICE QUESTIONS (MCQS)
(iii) Corroborative procedures, such as: Question 1
• Observing the auditor’s expert’s work; An auditor’s expert may be either an auditor’s internal or an external expert. Which of the
• Examining published data, such as statistical reports from reputable, authoritative sources; following cannot be an auditor’s internal expert?
• Confirming relevant matters with third parties; (a) Partner of the Auditor’s Firm
• Performing detailed analytical procedures; and (b) Temporary Staff of the Auditor’s Firm
• Re-performing calculations. (c) Permanent Staff of Auditor’s Network Firm
(iv) Discussion with another expert with relevant expertise when, for example, the findings or (d) A Prospective CA, soon to join the Auditor’s Firm as a Partner. (MTP 1 Marks, Oct 19)
conclusions of the auditor’s expert are not consistent with other audit evidence. Ans: (d)
(v) Discussing the auditor’s expert’s report with management.
Therefore, as per SA 620 on “Using the Work of an Auditor’s Expert”, the auditor shall evaluate the Question 2
adequacy of the auditor’s expert’s work for the auditor’s purposes, including:
Which among the following is not a factor for determining the necessity to use an auditor’s
(i) The relevance and reasonableness of that expert’s findings or conclusions, and their consistency expert to assist in obtaining sufficient appropriate audit evidence?
with other audit evidence;
(a) The use of a management’s expert by the management in preparing the financial statements
(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and
(b) The presence of an internal audit function and verification of the subject matter by them.
reasonableness of those assumptions and methods in the circumstances; and
(c) The nature and significance of matter including its complexity.
(iii) If that expert’s work involves the use of source data that is significant to that expert’s work, the
relevance, completeness, and accuracy of that source data. (d) The risk of material misstatement in the matter. (MTP 1 Marks, May 20)
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, Ans: (b)
the auditor shall:
(i) Agree with that expert on the nature and extent of further work to be performed by that expert;
or
(ii) Perform further audit procedures appropriate to the circumstances.

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SA 540 – Auditing Accounting Estimates, Including Fair Value Accounting Further as per SA 580 Written Representation, if management does not provide one or more of the
Estimates, and Related Disclosures requested written representations, the auditor shall
Question 1 (a) Discuss the matter with management;
(Includes concepts of SA 580- Written Representation) (b) Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
Statutory auditor of O Ltd requested the management for a written representation in respect of
obsolescence of inventory and warranty obligations recognized by the company in its financial (c) Take appropriate actions, including determining the possible effect on the opinion in the auditor’s
statements. The management denied the representation on the ground that during the course of report in accordance with SA 705.
audit, all the required procedures were performed by the auditor and after obtaining sufficient
appropriate audit evidence, auditor has issued a clean report. Please comment. (MTP 4 Marks,
Mar 19) Question 2
Answer 1 Adeshvar Pvt Ltd is engaged in the business of real estate. The auditor of the company requested
the information from the management to review the outcome of accounting estimates (like
As per SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and
estimated costs considered for percentage completion etc) included in the prior period financial
Related Disclosures, the auditor shall obtain written representations from the management and, where
statements and their subsequent re-estimation for the purpose of the current period.
appropriate, those charged with governance whether they believe significant assumptions used in
making accounting estimates are reasonable. The management has refused the information to the auditor saying that the review of prior
period information should not be done by the auditor. Please advise. (MTP 4 Marks Nov 21,
Depending on the nature, materiality and extent of estimation uncertainty, written representations about
MTP 5 Marks Mar’19 & Mar’21, PYP 5 Marks May ’23, RTP May’19, RTP May’23, Old &
accounting estimates recognized or disclosed in the financial statements may include representations:
New SM)
• About the appropriateness of the measurement processes, including related assumptions and
Answer 2
models, used by management in determining accounting estimates in the context of the applicable
financial reporting framework, and the consistency in application of the processes. As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures”, the auditor shall review the outcome of accounting estimates included
• That the assumptions appropriately reflect management’s intent and ability to carry out specific
in the prior period financial statements, or, where applicable, their subsequent re-estimation for the
courses of action on behalf of the entity, where relevant to the accounting estimates and disclosures.
purpose of the current period. The nature and extent of the auditor’s review takes account of the
• That disclosure related to accounting estimates are complete and appropriate under the applicable nature of the accounting estimates, and whether the information obtained from the review would be
financial reporting framework. relevant to identifying and assessing risks of material misstatement of accounting estimates made in
• That no subsequent event requires adjustment to the accounting estimates and disclosures included the current period financial statements.
in the financial statements. The outcome of an accounting estimate will often differ from the accounting estimate recognized
• For those accounting estimates not recognised or disclosed in the financial statements, written in the prior period financial statements. By performing risk assessment procedures to identify and
representations may also include representations about: understand the reasons for such differences, the auditor may obtain:
• The appropriateness of the basis used by management for determining that the recognition or • Information regarding the effectiveness of management’s prior period estimation process, from
disclosure criteria of the applicable financial reporting framework have not been met. which the auditor can judge the likely effectiveness of management’s current process.
• The appropriateness of the basis used by management to overcome the presumption relating to • Audit evidence that is pertinent to the re-estimation, in the current period, of prior period accounting
the use of fair value set forth under the entity’s applicable financial reporting framework, for those estimates.
accounting estimates not measured or disclosed at fair value. • Audit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in
Thus, management’s contention on the ground that during the course of audit, all the required procedures the financial statements.
were performed by the auditor and after obtaining sufficient appropriate audit evidence, auditor has The review of prior period accounting estimates may also assist the auditor, in the current period, in
issued a clean report, for not providing written representation is not correct. The management should identifying circumstances or conditions that increase the susceptibility of accounting estimates to,
provide written representations to the auditor. or indicate the presence of, possible management bias. The auditor’s professional skepticism assists
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in identifying such circumstances or conditions and in determining the nature, timing and extent of Question 4
further audit procedures. CA Harry is appointed as a Statutory Auditor of Delist Limited for the financial year 2021-22.
However, the review is not intended to call into question the judgments made in the prior periods that M/s Delist Limited is a listed entity at National Stock Exchange and the financial statements
were based on information available at that time. are to be drawn up in compliance with Ind AS. M/s Delist Limited made certain fair value
In the given case, the management is not correct in refusing the relevant information to the auditor. accounting estimates on complex financial instruments which are not traded in an active and
open market. CA Harry is concerned with identification and assessment of the risks of material
misstatement for accounting estimates. Guide him with regard to the estimation making process
Question 3 adopted by management with reference to the relevant Standard on Auditing. (PYP 4 Marks
May ‘22)
(Includes concepts of SA 580- Written Representation)
Answer 4
Mr. L while conducting the audit of ABC Ltd., observed that a substantial amount is recognized
in respect of obsolescence of inventory and warranty obligation in the financial statements. As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Mr. L wants to obtain written representation from the management to determine whether the Related Disclosures”, CA. Harry shall obtain an understanding of the following in order to provide
assumptions and estimates used are reasonable. Guide Mr. L with reference to the relevant a basis for the identification and assessment of the risks of material misstatements for accounting
Standard on Auditing. (PYP 5 Marks, NOV-19, Old SM) estimates:
Answer 3 The estimation making process adopted by the management including-
Written Representations: As per SA 540, “Auditing Accounting Estimates, Including Fair Value (1) The method, including where applicable the model, used in making the accounting estimates.
Accounting Estimates, and Related Disclosures”, the auditor shall obtain written representations (2) Relevant controls.
from management and, where appropriate, those charged with governance whether they believe
(3) Whether management has used an expert?
significant assumptions used in making accounting estimates are reasonable.
(4) The assumption underlying the accounting estimates.
• SA580, “Written Representations” discusses the use of written representations. Depending on the
nature, materiality and extent of estimation uncertainty, written representations about accounting (5) Whether there has been or ought to have been a change from the prior period in the methods for
estimates recognized or disclosed in the financial statements may include representations: making the accounting estimates, and if so, why; and
(i) About the appropriateness of the measurement processes, including related assumptions and (6) Whether and, if so, how the management has assessed the effect of estimation uncertainty.
models, used by management in determining accounting estimates in the context of the applicable
financial reporting framework, and the consistency in application of the processes.
Question 5
(ii) That the assumptions appropriately reflect management’s intent and ability to carry out specific
M/s ABC Limited is engaged in the business of construction of infrastructure and housing
courses of action on behalf of the entity, where relevant to the accounting estimates and disclosures.
projects. While preparing the financial statements for the year ended 31.03.2023, management
(iii) That disclosure related to accounting estimates are complete and appropriate under the applicable has made various accounting estimates and confirmed to the auditor that all necessary accounting
financial reporting framework. estimates have been recognised, measured and disclosed in the financial statements are in
That no subsequent event requires adjustment to the accounting estimates and disclosures included in accordance with the applicable financial reporting framework. The auditor during the course of
the financial statements. audit observed some changed circumstances giving rise to the need for an accounting estimate.
Inquiries of same were sought from the management. Can you list down some circumstances,
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: change of which will result in inquiries from the management? (PYP 4 Marks May ‘23)
Written Representations: Majority of the Examinees did not mention SA 540 but wrongly quoted Answer 5
SA 501 - Audit evidence and explained SA 580 unnecessarily. Those who mentioned SA 540 could
(a) As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
not give the correct points asked for.
and Related Disclosures”, inquiries of management about changes in circumstances may include,
for example, inquiries about whether:
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• The entity has engaged in new types of transactions that may give rise to accounting estimates. Question 7
• Terms of transactions that gave rise to accounting estimates have changed. M/s. HK & Co. was appointed as an auditor of GSB Limited, a company operating its business
• Accounting policies relating to accounting estimates have changed, as a result of changes to the in telecom sector. As per spectrum allocation agreement with Government, GSB Limited is
requirements of the applicable financial reporting framework or otherwise. required to pay certain percentage of its annual revenue as license fee. GSB Limited paid the
license fee on its core business for last two years. At the end of third year, the communication
• Regulatory or other changes outside the control of management have occurred that may require was received from Government that it needs to pay agreed percentage on its total revenues
management to revise, or make new, accounting estimates. and not only on core business revenues. Matter was disputed and went to court of law. On
• New conditions or events have occurred that may give rise to the need for new or revised accounting prudence basis, GSB Limited made a provision on estimated business in its books of accounts
estimates. of agreed percentage on non-core business receipts also. The amount of provision was of such
During the audit, the auditor may identify transactions, events and conditions that give rise to the need for huge amount that the GSB Limited’s profit and loss account for that quarter reflected loss due
accounting estimates that management failed to identify. SA 315 deals with circumstances where the auditor to that provision. How you as an auditor can evaluate this accounting estimate which involves
identifies risks of material misstatement that management failed to identify, including determining whether significant risk and what if Management has not addressed the effects of estimation uncertainty
there is a significant deficiency in internal control with regard to the entity’s risk assessment processes. on provision made? (PYP 4 Marks, Jan ’21, MTP 4 Marks March 22 & April ‘23)
Answer 7
In the given case, HK & Co. was appointed as an auditor of GSB Ltd., operating in Telecom sector.
Question 6
GSB Ltd paid the license fee on its core business revenue whereas Govt required it to pay on non-core
While auditing Z Ltd., you observe certain material financial statement assertions have been business receipts as well. Consequently, the amount of provision was of such a huge amount that GSB
based on estimates made by the management. As the auditor how do you minimize the risk of Ltd.’s profit and loss account reflected a loss due to that provision. As an auditor evaluation would
material misstatements? (MTP 4 Marks Apr’21, MTP 5 Marks Mar’18, Old & New SM) be done as under: For accounting estimates that give rise to significant risks, in addition to other
Answer 6 substantive procedures performed to meet the requirements of SA 330, the auditor shall evaluate the
As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related following:
Disclosures”, the auditor shall obtain an understanding of the following in order to provide a basis for (i) How management has considered alternative assumptions or outcomes, and why it has rejected
the identification and assessment of the risks of material misstatements for accounting estimates: them, or how management has otherwise addressed estimation uncertainty in making the
(i) The requirements of the applicable financial reporting framework relevant to the accounting accounting estimate.
estimates, including related disclosures. (ii) Whether the significant assumptions used by management are reasonable.
(ii) How Management identifies those transactions, events and conditions that may give rise to (iii) Where relevant to the reasonableness of the significant assumptions used by management or the
the need for accounting estimates to be recognised or disclosed, in the financial statements. In appropriate application of the applicable financial reporting framework, management’s intent to
obtaining this understanding, the auditor shall make inquiries of management about changes in carry out specific courses of action and its ability to do so.
circumstances that may give rise to new, or the need to revise existing, accounting estimates. (iv) If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
(iii) The estimation making process adopted by the management including- uncertainty on the accounting estimates that give rise to significant risks, the auditor shall, if
(1) The method, including where applicable the model, used in making the accounting estimates. considered necessary, develop a range with which to evaluate the reasonableness of the accounting
estimate.
(2) Relevant controls.
(3) Whether management has used an expert?
(5) Whether there has been or ought to have been a change from the prior period in the methods
for making the accounting estimates, and if so, why; and
(6) Whether and, if so, how the management has assessed the effect of estimation uncertainty.
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MULTIPLE CHOICE QUESTIONS (MCQS) SA 520 – Analytical procedures

Match the following terms to their definitions: In audit of DEF Limited, the Auditor had made use of certain analytical procedures with
regard to certain key data in the Statement of Profit and Loss. The results obtained showed
The susceptibility of an accounting estimate
inconsistencies with other relevant information. State the course of action that the Auditor
i. Accounting Estimates 1. and related disclosures to an inherent lack of
should take to ensure that the risk of material misstatement would be contained to a low level
precision in its measurement.
fixed as per materiality level. (PYP 4 Marks, Nov ‘18)
A lack of neutrality by management in the Answer 1
ii. Estimation uncertainty 2.
preparation and presentation of information.
Investigating Results of Analytical Procedures: As per SA 520, “Analytical Procedures”, if analytical
An approximation of a monetary amount in the procedures performed in accordance with this SA identify fluctuations or relationships that are
iii. Management bias 3.
absence of a precise means of measurement. inconsistent with other relevant information or that differ from expected values by a significant
Measurement objective for fair value To forecast the outcome of one or more amount, the auditor shall investigate such differences by:
iv. 4.
Accounting Estimates transactions, events or conditions. (i) Inquiring of management and obtaining appropriate audit evidence relevant to management’s
(a) (i)-3, (ii)-1, (iii) - 2, (iv)- 4. responses; and
(b) (i)-2, (ii)-1, (iii) - 1, (iv)- 4. (ii) Performing other audit procedures as necessary in the circumstances.
(c) (i)-1, (ii)-3, (iii) - 2, (iv)- 4. 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
(d) (i)-4, (ii)-1, (iii) - 2, (iv)- 1. (RTP May 22)
evidence obtained during the course of the audit.
Ans: (a)
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.

Investigating results of Analytical Procedure: Examinees failed to exhibit knowledge of SA 520
Analytical Procedures and gave answer in general terms.

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Question 1 Answer 2
While auditing Z Ltd., you observe certain material financial statement assertions have been Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”,
based on estimates made by the management. As the auditor how do you minimize the risk of the expertise of an expert may be required in the actuarial calculation of liabilities associated with
material misstatements? insurance contracts or employee benefit plans etc., however, the auditor has sole responsibility for the
Answer 1 audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work of an
auditor’s expert.
As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”, the auditor shall obtain an understanding of the following in order to provide The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
a basis for the identification and assessment of the risks of material misstatements for accounting including the relevance and reasonableness of that expert’s findings or conclusions, and their
estimates: consistency with other audit evidence as per SA 500.
(i) The requirements of the applicable financial reporting framework relevant to the accounting Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods,
estimates, including related disclosures. then the relevance and reasonableness of those assumptions and methods must be ensured by the
auditor and if the expert’s work involves the use of source data that is significant to that expert’s work,
(ii) How Management identifies those transactions, events and conditions that may give rise to
the relevance, completeness, and accuracy of that source data in the circumstances must be verified
the need for accounting estimates to be recognized or disclosed, in the financial statements. In
by the auditor.
obtaining this understanding, the auditor shall make inquiries of management about changes in
circumstances that may give rise to new, or the need to revise existing, accounting estimates. In the instant case, Mr. X, Mr. Y and Mr. Z, jointly appointed as auditors of KRP Ltd., referred their
own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per SA
(iii) The estimation making process adopted by the management including-
620. Mr. Y’s referred actuary has provided the gratuity valuation report, which later on was found
(1) The method, including where applicable the model, used in making the accounting estimates. faulty. Further, Mr. Z is not in agreement with this report, therefore, he submitted a separate audit
(2) Relevant controls. report specifically for such gratuity valuation.
(3) Whether management has used an expert? In such situation, it was duty of Mr. X, Mr. Y and Mr. Z, before using the gratuity valuation report of
Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They were
also required to examine the relevance, completeness and accuracy of source data used for such report
(5) Whether there has been or ought to have been a change from the prior period in the methods for before expressing their opinion.
making the accounting estimates, and if so, why; and
Mr. X and Mr. Y will be held responsible for gross negligence and using such faulty report without
(6) Whether and, if so, how the management has assessed the effect of estimation uncertainty. examining the adequacy of expert actuary’s work whereas Mr. Z will not be held liable for the same
due to separate opinion expressed by him.
Question 2
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors Question 3
to conduct audit for the financial year 2020-21. For the valuation of gratuity scheme of the A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall
company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference be considered in the development of overall audit plan?
of opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major
Answer 3
difference was found in the actuarial reports.
Development of an overall plan - Overall plan is basically intended to provide direction for audit work
However, Mr. X agreed to Mr. Y’s actuary report, though, Mr. Z did not. Mr. X contends that
programming and includes the determination of timing, manpower development and co-ordination
Mr. Y’s actuary report shall be considered in audit report due to majority of votes. Now, Mr. Z
of work with the client, other auditors and other experts. The auditor should consider the following
is in dilemma. Explain the responsibility of auditors, in case, report made by Mr. Y’s actuary,
matters in developing his overall plan for the expected scope and conduct of the audit:
later on, was found faulty.

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(i) Terms of his engagement and any statutory responsibilities (iii) Team’s Efforts: Consider the factors that, in the auditor’s professional judgment, are significant
(ii) Nature and timing of reports or other communications. in directing the engagement team’s efforts.
(iii) Applicable Legal or Statutory requirements. (iv) Preliminary Work: Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed by the engagement
(iv) Accounting policies adopted by the clients and changes, if any, in those policies.
partner for the entity is relevant.
(v) The effects of new accounting and auditing pronouncement on the audit.
(v) Nature, timing and Extent of Resources: Ascertain the nature, timing and extent of resources
(vi) Identification of significant audit areas. necessary to perform the engagement.
(vii) Setting of materiality levels for the audit purpose. Specific Factors for Online Shopping:
(viii) Conditions requiring special attention such as the possibility of material error or fraud or The auditor shall also obtain an understanding of the information system including the related business
involvement of parties in whom directors or persons who are substantial owners of the entity are processes due to new venture of online shopping in the following areas:
interested and with whom transactions are likely.
(i) The classes of transactions in the entity’s operations that are significant to the financial statements;
(ix) Degree of reliance to be placed on the accounting system and internal control.
(ii) The procedures, within both information technology (IT) and manual systems, by which those
(x) Possible rotation of emphasis on specific audit areas. transactions are initiated, recorded, processed, corrected as necessary, transferred to the general
(xi) Nature and extent of audit evidence to be obtained. ledger and reported in the financial statements;
(xii) Work of the internal auditors and the extent of reliance on their work, if any in the audit. (iii) The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions; this includes the
(xiii) Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement
correction of incorrect information and how information is transferred to the general ledger. The
of experts.
records may be in either manual or electronic form;
(xiv) Allocation of works to be undertaken between joint auditors and the procedures for its control
(iv) How the information system captures events and conditions, other than transactions, that are
and review.
significant to the financial statements;
(xv) Establishing and coordinating staffing requirements.
(v) Controls surrounding journal entries, including non-standard journal entries used to record
nonrecurring, unusual transactions or adjustments.
Question 4
As an auditor of garment manufacturing company for the last five years, you have observed Question 5
that new venture of online shopping has been added by the company during current year. What
During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his
factors would be considered by you in formulating the audit strategy of the company?
reviews and also ensured compliance with independence requirements that apply to the audit
Answer 4 engagement. The engagement files were also reviewed by the Engagement Quality Control
Formulation of Audit Strategy: While formulating the audit strategy for a company, following factors Reviewer (EQCR) except the independence assessment documentation. Engagement Partner
may be considered - was of the view that matters related to independence assessment are the responsibility of the
Engagement Partner and not Engagement Quality Control Reviewer. Engagement Quality
General Factors:
Control Reviewer objected to this and refused to sign off the documentation. Please advise as
Overall audit strategy would involve- per SA 220.
(i) Determination of Characteristics of Audit: Identify the characteristics of the engagement that Answer 5
defines its scope.
As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
(ii) Reporting Objectives: Ascertain the reporting objectives of the engagement to plan the timing requirements that apply to the audit engagement. In doing so, Engagement Partner shall:
of the audit and the nature of the communications required.

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(iv) Identification of the applicable financial reporting framework for the preparation of the financial
• Obtain relevant information from the firm and, where applicable, network firms, to identify and
statements; and
evaluate circumstances and relationships that create threats to independence;
(v) Reference to the expected form and content of any reports to be issued by the auditor and a statement
• Evaluate information on identified breaches, if any, of the firm’s independence policies and
that there may be circumstances in which a report may differ from its expected form and content.
procedures to determine whether they create a threat to independence for the audit engagement;
and
• Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying Question 7
safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal A Pvt Ltd is engaged in the business of real estate. The auditor of the company requested the
is permitted by law or regulation. The engagement partner shall promptly report to the firm any information from the management to review the outcome of accounting estimates (like estimated
inability to resolve the matter for appropriate action. costs considered for percentage completion etc.) included in the prior period financial statements
Engagement Partner shall take responsibility for reviews being performed in accordance with the and their subsequent re-estimation for the purpose of the current period.
firm’s review policies and procedures. As per SA 220, “Quality Control for Audit of Financial The management has refused the information to the auditor saying that the review of prior
Statements”, for audits of financial statements of listed entities, Engagement Quality Control Reviewer period information should not be done by the auditor. Please advise.
(EQCR), on performing an engagement quality control review, shall also consider the engagement
Answer 7
team’s evaluation of the firm’s independence in relation to the audit engagement. In the given case,
Engagement Partner is not right. The independence assessment documentation should also be given As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
to Engagement Quality Control Reviewer for his review. and Related Disclosures”, the auditor shall review the outcome of accounting estimates included
in the prior period financial statements, or, where applicable, their subsequent re- estimation for the
purpose of the current period. The nature and extent of the auditor’s review takes account of the
Question 6 nature of the accounting estimates, and whether the information obtained from the review would be
AKJ Ltd is a small-sized 30 years old company having business of manufacturing of pipes. relevant to identifying and assessing risks of material misstatement of accounting estimates made in
Company has a plant based out of Dehradun and have their corporate office in Delhi. Recently the current period financial statements.
the company appointed new firm of Chartered Accountants as their statutory auditors. The outcome of an accounting estimate will often differ from the accounting estimate recognized
The statutory auditors want to enter into an engagement letter with the company in respect of in the prior period financial statements. By performing risk assessment procedures to identify and
their services but the management has contended that since the statutory audit is mandated by understand the reasons for such differences, the auditor may obtain:
law, engagement letter may not be required. Auditors did not agree to this and have shared a • Information regarding the effectiveness of management’s prior period estimation process, from
format of engagement letter with the management for their reference before getting that signed. which the auditor can judge the likely effectiveness of management’s current process.
In this respect management would like to understand that as per SA 210 (auditing standard
• Audit evidence that is pertinent to the re-estimation, in the current period, of prior period accounting
referred to by the auditors), if the agreed terms of the engagement shall be recorded in an
estimates.
engagement letter or other suitable form of written agreement, what should be included in
terms of agreed audit engagement letter? • Audit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in
the financial statements.
Answer 6
The review of prior period accounting estimates may also assist the auditor, in the current period, in
As per SA 210 ‘Agreeing the Terms of Audit Engagements’, the auditor shall agree the terms of the
identifying circumstances or conditions that increase the susceptibility of accounting estimates to,
audit engagement with management or those charged with governance, as appropriate.
or indicate the presence of, possible management bias. The auditor’s professional skepticism assists
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other in identifying such circumstances or conditions and in determining the nature, timing and extent of
suitable form of written agreement and shall include: further audit procedures.
(i) The objective and scope of the audit of the financial statements; However, the review is not intended to call into question the judgments made in the prior periods that
(ii) The responsibilities of the auditor; were based on information available at that time.
(iii) The responsibilities of management; In the given case, the management is not correct in refusing the relevant information to the auditor.
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Question 8 Answer 9
X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them. Audit Program me of Movie Theatre Complex:
The company had various derivative contracts – options, forward contracts, interest rate swaps (i) Peruse the Memorandum of Association and Articles of Association of the entity.
etc. which were required to be fair valued for which company got the fair valuation done through
(ii) Ensure the object clause permits the entity to engage in this type of business.
an external third party. The statutory auditors of the company involved an auditor’s expert to
audit valuation of derivatives. Auditor and auditor’s expert were new to each other i.e., they (iii) In the case of income from sale of tickets:
were working for the first time together but developed a good bonding during the course of the (1) Verify the control system as to how it is ensured that the collections on sale of tickets of
audit. The auditor did not enter into any formal agreement with the auditor’s expert. Please various shows are properly and accurately accounted.
advise.
(2) Verify the system relating to online booking of various shows and the system o f realization
Answer 8 of money.
As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the (3) Check that there is overall system of reconciliation of collections with the number of seats
auditor’s expert’s work may vary considerably with the circumstances, as may the respective roles available for different shows in a day.
and responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent of
(iv) Verify the internal control system and its effectiveness relating to the income from café, shops,
communication between the auditor and the auditor’s expert. It is therefore required that these matters
pubs, game zone etc., located within the multiplex.
are agreed between the auditor and the auditor’s expert.
(v) Verify the system of control exercised relating to the income receivable from advertisements
In certain situations, the need for a detailed agreement in writing is required like -
exhibited within the premises and inside the hall such as hoarding, banners, slides, short films etc.
• The auditor’s expert will have access to sensitive or confidential entity information.
(vi) Verify the system of collection from the parking areas in respect of the vehicles parked by the customers.
• The matter to which the auditor’s expert’s work relates is highly complex.
(vii) In the case of payment to the distributors verify the system of payment which may be either
• The auditor has not previously used work performed by that expert. through out right payment or percentage of collection or a combination of both. Ensure at the
• The greater the extent of the auditor’s expert’s work, and its significance in the context of the audit. time of settlement, any payment of advance made to the distributor is also adjusted against the
amount due.
In the given case, considering the complexity involved in the valuation and volume of derivatives and
also due to the fact that the auditor and auditor’s expert were new to each other, auditor should have (viii) Verify the system of payment of salaries and other benefits to the employees and ensure that
signed a formal agreement/ engagement letter with the auditor’s expert in respect of the work assigned statutory requirements are complied with.
to him. (ix) Verify the payments effected in respect of the maintenance of the building and ensure the same
is in order.
Question 9 (x) Verify the insurance premium paid and ensure it covers the entire assets.
Cineplex, a movie theatre complex, is the foremost theatre located in Delhi. Along with the sale
of tickets over the counter and online booking, the major proportion of income is from the cafe, Question 10
shops, pubs etc. located in the complex. Its other income includes advertisements exhibited
XWL Limited was engaged in dealing in commodity futures trading based in Surat. CA P, based
within/outside the premises such as hoardings, banners, slides, short films etc. The facility for
at Delhi, was auditor of the company. The auditor did not even once visit office of the company
parking of vehicles is also provided in the basement of the premises.
and failed to understand the nature of business of the company. All the papers and account
Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you books were received on emails and audit was concluded.
are, therefore, required to draw an audit programmer initially in respect of its revenue and
There were also included in his working papers checklists which had a requirement of test
expenditure considering the above mentioned facts along with other relevant points relating to
checking of cost of raw material consumed & cost of stores and spares. There was nothing in his
a complex.
working papers showing understanding of nature of business of company. What does it reflect
upon planning of audit by CAP?
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Answer 10 Question 12
SA 300 requires the auditor to plan the audit in such a manner that it is performed effectively. It CA. Nikita is conducting audit of a leading society engaged in promoting awareness regarding
also requires auditor to establish overall audit strategy including identifying the characteristics of the usefulness of internet among the disadvantaged sections of society through easily understandable
engagement, facilitating him to define its scope and planning of nature, timing and extent of audit means and methods. The society is also registered under FCRA, 2010 for receipt of foreign
procedures required to be performed to achieve the objective of audit. contributions. During the course of audit, she embarked upon extensive procedures relating
SA 300 further requires the auditor to document the overall audit strategy, the audit plan and any to verification of receipt of foreign contributions to rule out “round-tripping” in comparison
significant changes made during the audit engagement to such plans. to procedures originally thought of. She is documenting various procedures performed by her
including relevant audit findings.
In the given situation, auditor didn’t even once visit the company and failed to understand about
business of the company. Therefore, he has flouted requirement of SA 300 to plan the audit in such a However, she doesn’t not feel need for putting into writing about how she planned the whole
manner that it is performed effectively. The auditor has to plan the audit commensurate to the nature exercise.
and complexity of the business of the entity and identify and assess the risk of material misstatement. Does she require refreshening of her knowledge?
Further, working papers of auditor also do not show his understanding of nature of business which is Answer 12
again a blatant violation of requirement of SA 300 which requires the auditor to document the overall SA 300 requires auditor to document audit plan and significant changes made during the audit
audit strategy, the audit plan and any significant changes made during the audit engagement to such engagement to the audit plan. It also requires auditor to document reasons for such changes.
plans.
The documentation of the audit plan is a record of the planned nature, timing and extent of risk
Inclusion of a checklist in working papers having requirement of test checking of cost of raw material assessment procedures and further audit procedures at the assertion level in response to the assessed
consumed & cost of stores and spares shows that it was a general checklist and specifics of business risks. It also serves as a record of the proper planning of the audit procedures that can be reviewed and
were never understood and audit was not planned to be conducted in an effective manner in accordance approved prior to their performance.
with requirements of SA 300.
Further, changes to audit plan along with reasons thereof due to embarking upon extensive procedures
related to verification of foreign contributions in comparison to what was originally envisaged need
Question 11 to be documented.
CA. Pradyuman is planning for audit of a listed company headquartered in NOIDA. While Failure to document audit plan could entail risk of not conducting audit according to professional
doing this exercise, he has made a list of various procedures intended to be performed by him standards in a qualitative manner.
during the course of audit. He has further made up his mind to decide about sample size at time
of performing various planned procedures. Is above approach proper?
Question 13
Answer 11
CA. Sourabh is engagement partner conducting statutory audit of BBI Bank for SBT & Associates.
SA 300 states that audit plan shall include description about nature, timing and extent of audit The bank has 1034 branches spread all over the country which are audited by branch auditors. In
procedures. respect of one large branch audited by a branch auditor, there were errors in NPA classification of
The extent of audit procedures also includes deciding about sample sizes to be tested for performing many advances which were not pointed out by branch auditor in his report through memorandum
audit procedures. Therefore, the said approach is not proper. Various procedures planned to be of changes and NIL memorandum of changes was reported electronically.
undertaken should also include considerations relating to sample sizes to be tested. During overall review of financial statements of bank by statutory auditor, the above said errors
did not come into light. The statutory auditor had also called soft copies of internal inspection
report and concurrent audit reports of above branch as part of overall review procedures.
However, these reports did not point towards any irregularities in such accounts.
Would statutory auditor of bank be liable for above lapses? What precautions have to be taken
by him while expressing opinion considering possibilities of such situations?

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Answer 13 In the given situation, inventories are being held for considerably long period before being sold. As
SA 600 states that the principal auditor would not be responsible in respect of the work entrusted company is dealing in niche products for new-born babies, there is a risk of inventory obsolescence
to the other auditors, except in circumstances which should have aroused his suspicion about the due to changes in customer preferences. It carries a significant risk of material misstatement and
reliability of the work performed by the other auditors. When the principal auditor has to base his requires more judgment on part of statutory auditor in planning and performing procedures.
opinion on the financial information of the entity as a whole relying upon the statements and reports In such circumstances, statutory auditor needs to perform procedures directly like comparing net
of the other auditors, his report should state clearly the division of responsibility for the financial realizable value of products with costs to verify completeness of provisions, recomputing of provisions
information of the entity by indicating the extent to which the financial information of components for obsolete stocks etc.
audited by the other auditors have been included in the financial information of the entity, e.g., the
Therefore, in the given situation, he should perform procedures directly in accordance with SA 610.
number of divisions/branches/subsidiaries or other components audited by other auditors.
In the given situation, nothing has come to light of statutory auditor which would arouse his suspicion
about reliability of work performed by branch auditor. Therefore, he would not be responsible for Question Illustration 15
work performed by branch auditor. CA. Amboj, a practicing-chartered accountant has been appointed as an internal auditor of
Further, it should be clearly stated in the report that 1034 branches of bank have been audited by Textile Ltd. He conducted the physical verification of the inventory at the year end and handed
branch auditors. over the report of such verification to CA. Kishore the statutory auditor of the Company, for his
view and reporting. Can CA. Kishor rely on such report?
Using the Work of Internal Auditor As per SA 610 “Using the Work of Internal Auditors”, while
Question 14
determining whether the work of the internal auditors can be used for the purpose of the audit,
CA. Keshavraj is conducting statutory audit of a listed company “Live with Nature Limited”. the external auditor shall evaluate-
The company is engaged in producing environment-friendly niche products for new-born
(a) The extent to which the internal audit function’s organizational status and relevant policies and
babies. There is also a well functioning internal audit department in the company. On perusal of
procedures support the objectivity of the internal auditors;
internal audit reports, he finds that not only verification of inventories was attended by internal
auditor at regular intervals during the year, workings were also made in respect of inventory (b) The level of competence of the internal audit function; and
valuation as at year end. (c) Whether the internal audit function applies a systematic and disciplined approach, including
He has also attended inventory count at end of financial year and no prima facie adverse quality control.
inferences were drawn by him. However, ongoing through inventory reports, he gathers that Further, the external auditor shall not use the work of the internal audit function if the external auditor
inventories are being held for considerably long period before being sold. The internal audit determines that:
reports have not taken this aspect into consideration. Should he choose to rely upon inventory
(a) The function’s organizational status and relevant policies and procedures do not adequately
valuation work performed by internal auditor?
support the objectivity of internal auditors;
Answer 14
(b) The function lacks sufficient competence; or
For a particular account balance, class of transaction or disclosure, the higher an assessed risk of
(c) The function does not apply a systematic and disciplined approach, including quality control.
material misstatement at the assertion level, the more judgment is often involved in planning and
performing the audit procedures and evaluating the results thereof. In such circumstances, the external In the instant case, CA. Kishore should ascertain the internal auditor’s scope of verification, area of
auditor will need to perform more procedures directly and accordingly, make less use of the work coverage and method of verification. He should review the report on physical verification taking into
of the internal audit function in obtaining sufficient appropriate audit evidence. Furthermore, as consideration these factors. If possible, he should also test check few items and he can also observe
explained in SA 200, the higher the assessed risks of material misstatement, the more persuasive the the procedures performed by the internal auditors.
audit evidence required by the external auditor will need to be, and, therefore, the external auditor will If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the report
need to perform more of the work directly. but if he finds that the verification is not in order, he has to decide otherwise. The final responsibility
to express opinion on the financial statement remains with the statutory auditor.

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Question ILLUSTRATION 16 Business profile of the company including its brief history, detail of its key managerial persons
While doing audit, Ram, the Auditor requires reports from experts for the purpose of Audit and brief description of company’s activities was obtained by her. She has also studied reports
evidence. What types of reports/opinions he can obtain and to what extent he can rely upon the relating to growth of India’s stationery market due to greater demand and impact of government
same? driven schemes like Sarv Shiksha Abhiyaan (SSAB). sides, she has also obtained risk management
policy of the company which contained company’s strategy to contain various risks.
Using the Work of an Auditor’s Expert’s per SA 620, “Using the Work of an Auditor’s Expert”,
during the audit, the auditor may seek to obtain, in conjunction with the client or independently, On perusal of financial statements of company, it is noticed that the company’s inventories as at
audit evidence in the form of reports, opinions, valuations and statements of an expert. close of financial year stood at Rs. 200 crore which constitutes about 25% of its total assets. She
is planning to identify significant audit risks pertaining to valuation of inventories.
While doing audit, Ram, the auditor can obtain the following types of reports, or options or
statements of an expert for the purpose of audit evidence: She is also considering about materiality level for financial statements as a whole.
(i) The valuation of complex financial instruments, land and buildings, plant and machinery, jewelry, Keeping in view above, answer the following questions:
works of art, antiques, intangible assets, assets acquired and liabilities assumed in business 1. The compliance with independence requirements and verification of integrity of promoters
combinations and assets that may have been impaired. and key management personnel has been ensured by CA. Anoothi. In this regard, which of
(ii) The actuarial calculation of liabilities associated with insurance contracts or employee benefit the following statements is likely to be a complete statement?
plans. (a) Such activities are required to performed strictly in terms of requirements and procedures outlined
(iii) The estimation of oil and gas reserves. in code of ethics issued by ICAI.
(iv) The valuation of environmental liabilities, and site clean-up costs. (b) Such activities are required to be performed in respect of an audit engagement in accordance with
SA 220 and these preliminary engagement activities are specifically identified in SA 210.
(v) The interpretation of contracts, laws and regulations.
(c) Such activities are required to performed in respect of an audit engagement in accordance with
(vi) The analysis of complex or unusual tax compliance issues.
SA 220 and these preliminary engagement activities form part of planning an audit in accordance
When the auditor intends to use the work of an expert, he shall evaluate the adequacy of the auditor’s with SA 300.
expert’s work, including the relevance and reasonableness of that expert’s findings or conclusions,
(d) Such activities are required to be performed in terms of requirements and procedures outlined in
and their consistency with other audit evidence; if that expert’s work involves use of significant
code of ethics issued by ICAI and are specifically identified in SA 210.
assumptions and methods, the relevance and reasonableness of those assumptions and methods in the
circumstances; and if that expert’s work involves the use of source data that is significant to his work, Ans: (c)
the relevance, completeness, and accuracy of that source data.
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, 2. The auditor has obtained risk management policy of the company. Which of the following
he shall agree with that expert on the nature and extent of further work to be performed by that expert; statements is most appropriate in this regard?
or perform further audit procedures appropriate to the circumstances (a) The understanding of company’s risk management policy is required by auditor. It may help the
auditor in identifying risks of material misstatement that management failed to identify.
Integrated Case Scenario (b) The understanding of company’s risk management policy is not required by auditor. It deals with
business risks of company. Audit risk is not influenced by company’s business risks.
CA. Anoothi has been offered appointment as auditor of an NSE listed company. She has
already ticked checkboxes relating to her independence vis-à-vis company and integrity of (c) The understanding of company’s risk management policy is required by auditor. However, it
promoters and key management personnel. Being satisfied on this count and after sending cannot help the auditor in identifying risks of material misstatement that management failed to
formal engagement letter to the company, she is in midst of planning activities for company’s identify.
audit. Owner of country’s one of topmost writing instrument brands, above said company is in (d) The understanding of company’s risk management policy is sufficient for an auditor to develop an
business of producing ball pens, gel pens, markers, folders and such general stationery products. audit plan.
Ans: (a)
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3. Which of the following is not likely to be a procedure for auditor to understand the company?
(a) Performing an online search to identify press reports relating to the company
(b) Reviewing any new SEBI and stock exchange requirements
(c) Reviewing whether fresh moneys were raised from public
(d) Seeking confirmation letters from bankers regarding outstanding balances
Ans: (d)
4. Considering auditor’s intention to identify significant audit risks pertaining to inventory

valuation, which of the following statements is likely to be true?
(a) Procedures planned to identify significant audit risks pertaining to inventory valuation forms part
of overall audit plan.
(b) Procedures planned to identify significant audit risks pertaining to inventory valuation forms part
of overall audit strategy.
(c) Procedures planned to identify significant audit risks pertaining to inventory valuation forms part
of tests of controls.
(d) Procedures planned to identify significant audit risks pertaining to inventory valuation forms part
of tests of details.
Ans: (a)
5. In relation to materiality levels for financial statements as a whole, which of the following
statements is most appropriate?
(a) Materiality has to be decided by auditor after identification and assessment of risks of material
misstatements.
(b) Materiality has to be decided by auditor prior to identification and assessment of risks of material
misstatements.
(c) Materiality has to be decided by auditor after performing risk assessment procedures.
(d) Materiality has to be decided by auditor at time of designing tests of controls and substantive
procedures.
Ans: (b)

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AUDIT PLANNING, STRATEGY & EXECUTION
CA Harshad Jaju
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4
MATERIALITY, RISK
ASSESSMENT AND
CHAPTER INTERNAL CONTROL
SA 315 and SA 330 – Risk Assessment

Question 1
ST Ltd is a growing company and currently engaged in the business of manufacturing of tiles.
The company is planning to expand and diversify its operations. The management has increased
the focus on the internal controls to ensure better governance. The management had a discussion
with the statutory auditors to ensure the steps required to be taken so that the statutory audit is
risk based and focused on areas of greatest risk to the achievement of the company’s objectives.
Please advise the management and the auditor on the steps that should be taken for the same.
(MTP 5 Marks ,Mar 19, RTP May 19, New SM)
Answer 1
The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
misstatements whether caused by fraud or errors exist in the financial statements.
This involves the following three key steps:
• Assessing the risks of material misstatement in the financial statements
• Designing and performing further audit procedures that respond to assessed risks and reduce the
risks of material misstatements in the financial statements to an acceptably low level; and
• Issuing an appropriate audit report based on the audit findings.
Risk Assessment
The risk assessment phase of the audit involves the following steps:
• Performing client acceptance or continuance procedures;
• Planning the overall engagement;
• Performing risk assessment procedures to understand the business and identify inherent and control risks;
• Identifying relevant internal control procedures and assessing their design and implementation
(those controls that would prevent material misstatements from occurring or detect and correct
misstatements after they have occurred);
• Assessing the risks of material misstatement in the financial statements;
• Identifying the significant risks that require special audit consideration and those risks for which
substantive procedures alone are not sufficient;
• Communicating any material weaknesses in the design and implementation of internal control to
management and those charged with governance; and
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MATERIALITY, RISK ASSESSMENT AND INTERNAL CONTROL MATERIALITY, RISK ASSESSMENT AND INTERNAL CONTROL
• Making an informed assessment of the risks of material misstatement at the financial statement Question 2
level and at the assertion level. Compute the overall Audit Risk if looking to the nature of business there are chances that 40%
Risk Response bills of services provided would be defalcated, inquiring on the same matter management has
This phase of the audit is to design and perform further audit procedures that respond to the assessed assured that internal control can prevent such defalcation to 75%. On his part the Auditor
risks of material misstatement and will provide the evidence necessary to support the audit opinion assesses that the procedure he could apply in the remaining time to complete Audit gives him
Some of the matters the auditor should consider when planning the audit procedures include: satisfaction level of detection of frauds & error to an extent of 60%. Analyze the Risk of Mater
ial Misstatement and find out the overall Audi t Risk. (MTP 4 Marks, Oct 20, MTP 5 Marks
• Assertions that cannot be addressed by substantive procedures alone. This can occur where there is Apr’19, Old & New SM)
highly automated processing of transactions with little or no manual intervention.
Answer 2
• Existence of internal control that, if tested, could reduce the need/scope for other substantive
procedures. According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an
• The potential for substantive analytical procedures that would reduce the need/scope for other inappropriate opinion while Financial Statements are materially misstated.
types of procedures.
Audit Risk has two components namely: Risk of material Misstatement and Detection Risk. The
• The need to incorporate an element of unpredictability in procedures performed. relationship can be defined as follows.
• The need to perform further audit procedures to address the potential for management override of Audit Risk = Risk of material Misstatement x Detection Risk
controls or other fraud scenarios.
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
The need to perform specific procedures to address “significant risks” that have been identified. Misstatement may exist in Financial Statement before start of the Audit. It has two components namely
Audit procedures designed to address the assessed risks could include a mixture of: Inherent risk and Control risk.
• Tests of the operational effectiveness of internal control; and The relationship can be defined as
• Substantive procedures such as tests of details and analytical procedures Risk of material Misstatement = Inherent risk X control risk
Reporting Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction, disclosure
The final phase of the audit is to assess the audit evidence obtained and determine whether it is towards misstatements which may be either individually or collectively with other Misstatement
sufficient and appropriate to reduce the risks of material misstatement in the financial statements to becomes material before considering any related internal control which is 40% in the given case.
an acceptably low level. Control risk: it is a risk that there may be chances of material Misstatement even if there is a control
It is important at this stage to determine: applied by the management and it has prevented defalcation to 75%.
• If there had been a change in the assessed level of risk; Hence, control risk is 25% (100%-75%)
• Whether conclusions drawn from work performed are appropriate; and Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10%
• If any suspicious circumstances have been encountered. Chances of material Misstatement are reduced to 10% by the internal control applied by management.
• Any additional risks should be appropriately assessed, and further audit procedures performed as Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
required. procedures were applied, Detection Risk is 100-60=40%
When all procedures have been performed and conclusions reached: In the given case, overall Audit Risk can be reduced up to 4% as follows: Audit Risk: Risk of Material
Misstatement X Detection Risk = 10X 40% = 4%
• Audit findings should be reported to management and those charged with governance; and
• An audit opinion should be formed, and a decision made on the appropriate wording for the
auditor’s report.

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Question 3 It is a risk Management standard published by the International Organization for Standardization and
ZOB Limited is planning to be listed. The management of company has pulled up its socks and provides guidelines on managing risk faced by organizations. The application of these guidelines can
decided to implement “Enterprise Risk Management Program” for identifying and assessing be customized to any organization and its context.
various risks. Differentiating scope of such a program from internal control framework, discuss
what does
Question 4
“Risk Assessment Process” is likely to include in such a program. Also identify any two such
In the course of audit of Z Ltd, its auditor wants to rely on audit evidence obtained in previous
widely available ERM frameworks. (MTP 5 Marks Oct ‘23)
audit in respect of effectiveness of internal controls instead of retesting the same during the
Answer 3 current audit. As an auditor discuss the factors that may warrant a re-test of controls. (MTP Oct
The scope of an Enterprise Risk Management program is much broader than an internal control 19, RTP May 22 & Nov 18)
framework and encompasses both internal and external factors that are relevant to business strategy, Answer 4
governance, business process and transaction and activity level. The focus of an internal control
As per SA 330 on “The Auditor’s Responses to Assessed Risks”, changes may affect the relevance of
framework is primarily around financial reporting, operations and compliance risks associated with an
the audit evidence obtained in previous audits such that there may no longer be a basis for continued
account balance, business process, transaction and activity level, which form a sub-set of the overall
reliance.
enterprise risks.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is
This Enterprise Risk Management – Integrated Framework expands on internal control providing
a matter of professional judgment. In addition, the length of time between retesting such controls is
a more robust and extensive focus on the broader subject of enterprise risk management. While it
also a matter of professional judgment.
is not intended to and does not replace the internal control framework, but rather incorporates the
internal control framework within it, companies may decide to look to this enterprise risk management Factors that may warrant a re-test of controls are-
framework both to satisfy their internal control needs and to move toward a fuller risk management (i) A deficient control environment.
process.
(ii) Deficient monitoring of controls.
One of the most critical components of Enterprise Risk Management is the risk assessment process.
(iii) A significant manual element to the relevant controls.
The risk assessment process involves considerations for: -
(iv) Personnel changes that significantly affect the application of the control.
• Risk identification
(v) Changing circumstances that indicate the need for changes in the control.
• Assessment criteria including qualitative and quantitative factors
(vi) Deficient general IT -controls.
• Definition of key performance and risk indicators;
• Risk appetite
Question 5
• Risk scores, scales and maps
While conducting a statutory audit of “Hope Solutions Limited”, CA Y has assessed the risk of
• Assess risks
material misstatement to be low at the financial statement level and at the assertion level due to a
• Use of data & metrics stable, established and relatively less risky business and extremely satisfactory internal controls
• Prioritise risk operating in the company. However, despite the low assessed risk of material misstatement,
he chooses to send external confirmation requests to third parties for confirmation of certain
• Benchmarking
material contracts entered into with them by the company. By doing so, he intends to obtain
Two most widely used ERM frameworks are: - evidence regarding certain assertions contained in the financial statements of the company. Do
COSO Enterprise Risk Management – Integrated Framework developed by the Committee of you think his approach is in accordance with Standards on Auditing? Justify your answer with
Sponsoring Organisations (COSO) to address the changes in business environment. reasons. (MTP 5 Marks Oct ‘23)
ISO 31000 Risk Management standard published by the International Organization for Standardization.

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Answer 5 Auditor’s Responses to the Assessed Risk of Material Misstatement: According to SA 330 “The
SA 330 states that irrespective of the assessed risk of material misstatement, the auditor shall design Auditor’s Responses to Assessed Risks”, the auditor shall design and implement overall responses to
and perform substantive procedures for each material class of transactions, account balance and address the assessed risks of material misstatement. In designing the audit procedures to be performed,
disclosure. In the given situation, the auditor has assessed the risk of material misstatement to be low. the auditor shall:
However, despite such assessment, substantive procedures have to be performed. Consider the reasons for the assessment given to the risk of material misstatement at the assertion
level for each class of transactions, account balance, and disclosure, including:
SA 330 further states that the auditor shall consider whether external confirmation procedures are
to be performed as substantive audit procedures. External confirmation procedures frequently are (1) The likelihood of material misstatement due to the particular characteristics of the relevant class
relevant when addressing assertions associated with account balances and their elements but need not of transactions, account balance, or disclosure; and
be restricted to these items. For example, the auditor may request external confirmation of the terms (2) Whether the risk assessment takes into account the relevant controls, thereby requiring the auditor
of agreements, contracts, or transactions between an entity and other parties. to obtain audit evidence to determine whether the controls are operating effectively; and Obtain
Despite the low assessed risk of material misstatement, substantive procedures have to be performed more persuasive audit evidence the higher the auditor’s assessment of risk.
due to the following reasons: -
(i) The auditor’s assessment of risk is judgmental and so may not identify all risks of material Question 7
misstatement and
General steps in the conduct of risk based audit. (RTP Nov 20)
(ii) there are inherent limitations to internal control, including management override.
Answer 7
It is also in accordance with the spirit of professional skepticism. Therefore, as discussed above, the
General Steps in the Conduct of Risk Base Audit: RBA consists of four main phases starting with the
approach of CA Y is in accordance with Standards on Auditing.
identification and prioritization of risks, to the determination of residual risk, reduction of residual
risk to acceptable level and the reporting to auditee of audit results. These are achieved through the
Question 6 following:
While commencing the statutory audit of Alex Co. Ltd., what would you consider as an auditor Step 1 Understand auditee operations to identify and prioritize risks: Understanding auditee
to assess risk of material misstatement and responses to such risks? (RTP May 18) operations involves processes for reviewing and understanding the audited organization’s risk
management processes for its strategies, framework of operations, operational performance and
Answer 6
information process framework, in order to identify and prioritize the error and fraud risks that impact
Considerations of Auditor for Assessing the Risk of Material Misstatement: As per SA 315 the audit of financial statements. The environment in which the auditee operates, the information
“Identifying and Assessing the Risk of Material Misstatement through understanding the Entity and its required to monitor changes in the environment, and the process or activities integral to the audited
Environment”, the auditor shall identify and assess the risks of material misstatement at the financial entity’s success in meeting its objectives are the key factors to an understanding of agency risks.
statement level; and the assertion level for classes of transactions, account balances, and disclosures to
Likewise, a performance review of the audited entity’s delivery of service by comparing expectations
provide a basis for designing and performing further audit procedures. For this purpose, the auditor shall:
against actual results may also aid in understanding agency operations.
(i) Identify risks throughout the process of obtaining an understanding of the entity and its
Step 2 Assess auditee management strategies and controls to determine residual audit risk:
environment, including relevant controls that relate to the risks, and by considering the classes
Assessment of management risk strategies and controls is the determination as to how controls within
of transactions, account balances, and disclosures in the financial statements;
the auditee are designed. The role of internal audit in promoting a sound accounting system and
(i) Assess the identified risks, and evaluate whether they relate more pervasively to the financial internal control is recognized, thus the SAI should evaluate the effectiveness of internal audit to
statements as a whole and potentially affect many assertions; determine the extent to which reliance can be placed upon it in the conduct of substantive tests.
(ii) Relate the identified risks to what can go wrong at the assertion level, taking account of relevant Step 3 Manage residual risk to reduce it to acceptable level: Management of residual risk requires
controls that the auditor intends to test; and the design and execution of a risk reduction approach that is efficient and effective to bring down
(iii) Consider the likelihood of misstatement, including the possibility of multiple misstatements, and residual audit risk to an acceptable level. This includes the design and execution of necessary audit
whether the potential misstatement is of a magnitude that could result in a material misstatement. procedures and substantive testing to obtain evidence in support of transactions and balances. More

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resources should be allocated to areas of high audit risks, which were earlier known through the Question 8
analytical procedures undertaken. PADHAM Ltd is engaged in the business of manufacturing of carpets. The company is planning
Step 4 Inform auditee of audit results through appropriate report: The results of audit shall be to expand and diversify its operations. The management has increased the focus on internal
communicated by the auditor to the audited entity. The auditor must immediately communicate to the controls to ensure better governance. The management discussed with the statutory auditors
auditee reportable conditions that have been observed even before completion of the audit, such as to ensure the steps required to be taken so that the statutory audit is risk based and focused on
weaknesses in the internal control system, deficiencies in the design and operation of internal controls areas of greatest risk to the achievement of the company’s objectives.
that affect the organization’s ability to record, process, summarize and report financial data. (a) Name the key steps and phases involved in Risk Based Audit.
Steps for Risk Identification: (b) Also, discuss the steps to be taken for the risk assessment phase of the audit. (RTP May 22)
Assess auditee Answer 8

Understand management Inform auditee The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
Manage residual
auditee strategies of audit results misstatements whether caused by fraud or errors exist in the financial statements.
risk to reduce
operations to and controls through (a) This involves the following three key steps:
it to acceptable
identify and to determine appropriate
level • Assessing the risks of material misstatement in the financial statements
prioritize risks residual audit report
risk • Designing and performing further audit procedures that respond to assessed risks and reduce
the risks of material misstatements in the financial statements to an acceptably low level; and
• Assess the significance of the assessed risk, impact of its occurrence and also revise the materiality
accordingly for the specific account balance. • Issuing an appropriate audit report based on the audit findings. The risk-based audit process is
presented in three distinct phases:
• Determine the likelihood for assessed risk to occur and its impact on our auditing procedures.
(b) The risk assessment phase of the audit involves the following steps:
• Document the assertions that are effected.
• Consider the impact of the risk on each of the assertions (completeness, existence, accuracy, validity,
valuation and presentation) relevant to the account balance, class of transactions, or disclosure. • Planning the overall engagement;
• Identify the degree of Significant risks that would require separate attention and response by the • Performing risk assessment procedures to understand the business and identify inherent and
auditor. Planned audit procedures should directly address these risks. control risks;
• Enquire and document the management’s response. • Identifying relevant internal control procedures and assessing their design and implementation
• Consider the nature of the internal control system in place and its possible effectiveness in mitigating
the risks involved. Ensure the controls :
• Routine in nature (occur daily) or periodic such as monthly.
• Identifying the significant risks that require special audit consideration and those risks for
• Designed to prevent or detect and correct errors.
which substantive procedures alone are not sufficient;
• Manual or automated.
• Communicating any material weaknesses in the design and implementation of internal control
• Consider any unique characteristics of the risk. to management and those charged with governance; and
• Consider the existence of any particular characteristics (inherent risks) in the class of transactions, • Making an informed assessment of the risks of material misstatement at the financial statement
account balance or disclosure that need to be addressed in designing further audit procedures. level and at the assertion level.
• Examples could include high value inventory, complex contractual agreements, absence of a paper
trail on certain transaction streams or a large percentage of sales coming from a single customer.
• As per amendment
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Question 9 evidence as to the operating effectiveness of relevant controls as she intends to rely on the operating
(Includes concepts of SA 550 Related Parties) effectiveness of controls in determining the nature, timing and extent of substantive procedures.
While formulating the audit plan and responding to the risks of material misstatement identified Further, she is also required to obtain the audit evidence about significant changes to those controls
and assessed in related party transaction and relationships, Ms. K the engagement manager of the subsequent to the interim period along with the additional audit evidence to be obtained for the
audit team of ABC Limited, decided to rely upon the internal controls placed for identification remaining period in accordance with the requirements of Standards on Auditing as discussed above.
and disclosure of related party relationships and transactions in accordance with the applicable
financial reporting framework.
Question 10
You are requested to guide Ms. K regarding the necessity to test the controls to obtain sufficient
The identified risks are assessed by Auditor as to its significance on account of its likely impact,
and appropriate audit evidence. Also guide, whether Ms. K can use the audit evidence obtained,
by way of material misstatement appearing in financial statements or by affecting internal
regarding operative effectiveness of control on identification and disclosure of related party
control system. What may be the points of indication that may direct the Auditor to judge that
relationships and transactions, in the interim period. (RTP Nov ’21)
the risks identified may be significant? (PYP 4 Marks, Nov ’18, PYP 5 Marks Jan’21)
Answer 9
Answer 10
As per SA 550, “Related Parties”, according to para on “Responses to the risks of material misstatement
Points of Indication that may direct the Auditor to Judge that the Risks Identified may be Significant:
associated with related party relationships and transactions”, the auditor should design and performs
As per SA 315“Identifying and Assessing the Risks of Material Misstatement through Understanding
further audit procedures to obtain sufficient appropriate audit evidence about the assessed risks of
the Entity and Its Environment”, as part of the risk assessment the auditor shall determine whether any
material misstatement associated with related party relationships and transactions.
of the risks identified are, in the auditor’s judgment, a significant risk. In exercising this judgment, the
Further, as per SA 330, “The Auditor’s Responses to Assessed Risks”, the auditor shall design and auditor shall exclude the effects of identified controls related to the risk.
perform tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness
In exercising judgment as to which risks are significant risks, the auditor shall consider at least the
of relevant controls when:
following:
(a) the auditor’s assessment of risks of material misstatement at the assertion level includes an
(i) Whether the risk is a risk of fraud;
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 (ii) Whether the risk is related to recent significant economic, accounting, or other developments like
procedures); or changes in regulatory environment, etc., and, therefore, requires specific attention;
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion (iii) The complexity of transactions;
level. (iv) Whether the risk involves significant transactions with related parties;
In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence (v) The degree of subjectivity in the measurement of financial information related to the risk,
the greater the reliance the auditor places on the effectiveness of a control. Moreover, the auditor shall especially those measurements involving a wide range of measurement uncertainty; and
test controls for the particular time, or throughout the period, for which the auditor intends to rely on
(vi) Whether the risk involves significant transactions that are outside the normal course of business
those controls, subject to when the auditor obtains audit evidence about the operating effectiveness of
for the entity, or that otherwise appear to be unusual.
controls during an interim period, and the timing of test of controls over significant risks, in order to
provide an appropriate basis for the auditor’s intended reliance. When the auditor has determined that a significant risk exists, the auditor shall obtain an understanding
of the entity’s controls, including control
When the auditor obtains audit evidence about the operating effectiveness of controls during an
interim period, the auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to the interim period;
Indication to judge that risk are significant: Majority of the examinees have no idea about the
and
topic.
(b) Determine the additional audit evidence to be obtained for the remaining period.
In the current case, Ms. K shall design and perform tests of controls to obtain sufficient appropriate audit
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The Entity’s Risk Assessment Process includes how management identifies business risks During the process of extracting the exception reports, the auditors noted numerous purchase
relevant to the preparation of financial statements in accordance with the entity’s applicable entries without valid purchase orders. In terms of percentage, about 40% of purchases were
financial reporting framework, estimates their significance, assesses the likelihood of occurrence made without valid purchase orders whereas few purchase orders were validated after the
and decides upon actions to respond to and manage them and the results thereof. Elucidate the actual purchase. Also, there was no reconciliation between the goods received and the goods
circumstances in which risks can arise or change. (PYP 5 Marks, Nov ’19, Old SM) ordered. You are required to briefly explain the audit procedures to address the validity of
Answer 11 account balance level. (MTP 4 Marks, April 21, MTP 4 Marks Mar’23, New SM Illustration)
Entity’s Risk Assessment Process: Risks can arise or change due to circumstances such as the Answer 12
following- In the given scenario, the auditors noted numerous purchase entries without valid purchase orders
(i) Changes in operating environment: Changes in the regulatory or operating environment can during the process of extracting the exception reports. Further, in terms of percentage, about 40%
result in changes in competitive pressures and significantly different risks. of purchases were made without valid purchase orders and also few purchase orders were validated
after the actual purchase. Also there was no reconciliation between the goods received and the goods
(ii) New personnel: New personnel may have a different focus on or understanding of internal
ordered.
control.
Audit Procedures: The following procedures may address the validity of the account balance:
(iii) New or revamped information systems: Significant and rapid changes in information systems
can change the risk relating to internal control. • Make a selection of the purchases, review correspondence with the vendors, purchase requisitions
(internal document) and reconciliations of their accounts.
(iv) Rapid growth: Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls. • Review Vendor listing along with the ageing details. Follow up the material amounts paid before
the normal credit period and analyses the reasons for exceptions.
(v) New technology: Incorporating new technologies into production processes or information
systems may change the risk associated with internal control. • Meet with the company’s Purchase officer and obtain responses to our inquiries regarding the
purchases made without purchase orders.
(vi) New business models, products, or activities: Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control. • Discuss the summary of such issues with the client.
(vii) Corporate restructurings: Restructurings may be accompanied by staff reductions and changes
in supervision and segregation of duties that may change the risk associated with internal control.
(viii) Expanded foreign operations: The expansion or acquisition of foreign operations carries new
and often unique risks that may affect internal control, for example, additional or changed risks
from foreign currency transactions.
New accounting pronouncements: Adoption of new accounting principles or changing
accounting principles may affect risks in preparing

Entity’s Risk Assessment Process: Few Examinees could write correct answer to the point while
most of the Examinees erred in mentioning about various types of Risks viz.
Inherent Risk, Detection Risk and Control Risk.

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MULTIPLE CHOICE QUESTIONS (MCQS) Internal Control

The acceptable detection risk needs to be ______ in order to reduce the audit risk to __ in the XYZ Hospital Private Ltd. is engaged in running a hospital of 200 Beds since last 20 years.
area of inventories management and handling. Revenue Track of the hospital for last 3 years is as under:
(a) low in order to reduce audit risk to an acceptably high level. 2015-16 -20 Crores
(b) high in order to reduce audit risk to an acceptably high level. 2016-17 25 Crores
(c) low in order to reduce audit risk to an acceptably low level. 2017-18 35 Crores
(d) high in order to reduce audit risk to an acceptably low level. (MTP 1 Marks, March 21) Hospital has its own Pharmacy, Laboratory, Blood Bank, Radiology & General Stores. Its
Ans: (c) management suspects that leakages/theft is happening in Pharmacy, Radiology, Laboratory and
General Stores departments. It seeks advice of RST & Co., Internal Auditors of the Company,
as to how it can Institute/Improve its Internal Control. In this context, Management wants to
Question 2 understand the concept of components of Internal Control Structure in detail. Advise. (MTP 4
Speak Ltd. is showing a commission expense of ₹ 2 crore during the month of October 2023. Marks, Aug’18)
The auditor has made an effort to understand the business process that makes up this financial Answer 1
statement line item as to how it is initiated, recorded, approved, posted and reported. During The Internal Control structure in an organization is referred to as the policies and procedures established
this exercise, he finds that there is a difference of ₹ 1,50,000/- in the commission recorded as per by the entity to provide reasonable assurance that the objectives are achieved. The control structure in
the Sanchar Software (source) and commission as reflected in SAP accounts (destination). an organization basically has the following components:
What is the kind of risk assessment carried out by the auditor in the given case? a. Control Environment - Control environment covers the effect of various factors like management
(a) It is an evaluation of risks and controls at process level. attitude; awareness and actions for establishing, enhancing or mitigating the effectiveness of
(b) It is a direct entity level control evaluation. specific policies and procedures.
(c) It is an indirect entity level control evaluation. b. Accounting System - Accounting system means the series of task and records of an entity
by which transactions are processed for maintaining financial records. Such system identifies,
(d) There is no risk assessment as such carried out by the auditor. (MTP 1 Mark Sep ’23)
assemble, analyze, calculate, classify, record, summarize and report transactions and other events.
Ans: (a)
c. Control Procedure - Policies and procedures means those policies and procedures in addition
to the control environment and accounting systems which the management has established to
achieve the entity’s specific objectives.
In this regard, the management is responsible for maintaining an adequate accounting system
incorporating various internal controls to the extent that they are appropriate to the size and nature
of the business. There should be reasonable assurance for the auditor that the accounting system is
adequate and that all the accounting information required to be recorded has in fact been recorded.
Internal controls normally contribute to such assurance. The auditor should gain an understanding of
the accounting system and related internal controls and should study and evaluate the operation of
those internal controls upon which he wishes to rely in determining the nature, timing and extent of
other audit procedures. Where the auditor concludes that he can rely on certain internal controls, he
could reduce his substantive procedures which otherwise may be required and may also differ as to
the nature and timing.

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Specific Requirement under SA 315 - “Identifying and Assessing the Risks of Material Misstatement In the given scenario, Company has not done proper division of work as:
through Understanding the Entity and its Environment” deals with the auditor’s responsibility to (i) the receipts of cash should not be handled by the official handling sales ledger and
identify and assess the risks of material misstatement in the financial statements, through understanding
(ii) delivery challans should be verified by an authorized official other than the officer handling
the entity and its environment, including the entity’s internal control.
despatch of goods.
Question 2
Question 3
BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of
During the course of his audit, the auditor noticed material weaknesses in the internal control
the company for the year 2018-19. In order to review internal controls of the Sales Department
system and he wishes to communicate the same to the management. You are required to elucidate
of the company, you visited the Department and noticed the work division as follows:
the important points the auditor should keep in the mind while drafting the letter of weaknesses
a. An officer was handling the sales ledger and cash receipts. in internal control system. (MTP 4 Marks, May’ 20 & Oct 18, RTP May 20 & Nov 18, Old &
b. Another official was handling dispatch of goods and issuance of Delivery challans. New SM)
c. One more officer was there to handle customer/ debtor accounts and issue of receipts. Answer 3
As an internal auditor, you are required to briefly discuss the general condition pertaining to Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265, “Communicating
the internal check system prevalent in internal control system. Do you think that there was Deficiencies in Internal Control to Those who Charged with Governance and Management”, the
proper division of work in BSF Limited? If not, why? (MTP 5 Marks, Oct 19 & April 22, RTP auditor shall include in the written communication of significant deficiencies in internal control -
Nov 19, Old & New SM) a. A description of the deficiencies and an explanation of their potential effects; and
Answer 2 b. Sufficient information to enable those charged with governance and management to understand the
The general condition pertaining to the internal check system may be summarized as under: context of the communication.
a no single person should have complete control over any important aspect of the business operation. In other words, the auditor should communicate material weaknesses to the management or the audit
Every employee’s action should come under the review of another person. committee, if any, on a timely basis. This communication should be, preferably, in writing through a
b. Staff duties should be rotated from time to time so that members do not perform the same function letter of weakness or management letter. Important points with regard to such a letter are as follows
for a considerable length of time. i. The letter lists down the area of weaknesses in the system and offers suggestions for improvement.
c. Every member of the staff should be encouraged to go on leave at least once a year. ii. It should clearly indicate that it discusses only weaknesses which have come to the attention of
d. Persons having physical custody of assets must not be permitted to have access to the books of the auditor as a result of his audit and that his examination has not been designed to determine the
accounts. adequacy of internal control for management.
e. There should exist an accounting control in respect of each class of assets, in addition, there should iii. This letter serves as a valuable reference document for management for the purpose of revising the
be periodical inspection so as to establish their physical condition. system and insisting on its strict implementation.
f. Mechanical devices should be used, where ever practicable to prevent loss or misappropriation of cash. iv. The letter may also serve to minimize legal liability in the event of a major defalcation or other loss
resulting from a weakness in internal control
g. Budgetary control should be exercised and wide deviations observed should be reconciled.
h. For inventory taking, at the close of the year, trading activities should, if possible be suspended,
and it should be done by staff belonging to several sections of the organization. Question 4
i. The financial and administrative powers should be distributed very judiciously among different As auditor of ZED Ltd., you would like to limit your examination of account balance tests. What
officers and the manner in which those are actually exercised should be reviewed periodically. are the control objectives you would like the accounting control system to achieve to suit your
purpose? (MTP 4 Marks, March 21, Old & New SM)
j. Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
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Answer 4 (vii) Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the
Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be concessional rates, say, for group booking should be properly authorized and signed forms for
achieved by any accounting control system are - such authorization should be preserved.
a. Whether all transactions are recorded; (viii)Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts,
daily banking, reconciliation and stock of unsold tickets etc.
b. Whether recorded transactions are real;
c. Whether all recorded transactions are properly valued;
Question 6
d. Whether all transactions are recorded timely;
New Life Hospital is a multi-specialty hospital which has been facing a lot of pilferage and
e. Whether all transactions are properly posted;
troubles regarding their inventory maintenance and control. On investigation into the matter it
f. Whether all transactions are properly classified and disclosed; was found that the person in charge of inventory inflow and outflow from the store house is also
g. Whether all transactions are properly summarized. responsible for purchases and maintaining inventory records. According to you, which basis
system of control has been violated? Also advise the other general conditions pertaining to such
system which needs to be maintained and checked by the management. (MTP 5 Marks, March
Question 5 18, Old & New SM, RTP May 20)
Yex Ltd. has five entertainment centers to provide facilities for public especially for children Answer 6
and youngsters at 5 different locations in the peripheral of 200 kms. Collections are made in
Basic system of Control: Internal Checks and Internal Audit are important constituents of Accounting
cash. Specify the adequate control system towards collection of money. (MTP 4 Marks, April
Controls. Internal check system implies organization of the overall system of book-keeping and
18, Old & New SM)
arrangement of Staff duties in such a way that no one person can carry through a transaction and
Answer 5 record every aspect thereof.
Control System over Selling and Collection of Tickets: In order to achieve proper internal control In the given case of New Life Hospital, the person-in-charge of inventory inflow and outflow from
over the sale of tickets and its collection by the Yex Co. Ltd., following system should be adopted - the store house is also responsible for purchases and maintaining inventory records. Thus, one of the
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a basic system of control i.e. internal check which includes segregation of duties or maker and checker
way that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial has been violated where transaction processing are allocated to different persons in such a manner that
numbers should not be repeated during a reasonable period, say a month or year depending on no one person can carry through the completion of a transaction from start to finish or the work of one
the turnover. The separate series of the serial should be used for such denomination. person is made complimentary to the work of another person.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5 The general condition pertaining to the internal check system may be summarized as under-
centres, preferably through machines. There should be proper control over the keys of the machines. (i) No single person should have complete control over any important aspect of the business
(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with operation. Every employee’s action should come under the review of another person.
the number of tickets sold. Serial number of tickets for each entertainment activity/denomination (ii) Staff duties should be rotated from time to time so that members do not perform the same
will facilitate the reconciliation. function for a considerable length of time.
(iv) Daily banking: Each day’s collection should be deposited in the bank on next working day of the (iii) Every member of the staff should be encouraged to go on leave at least once a year.
bank. Till that time, the cash should be in the custody of properly authorized person preferably in
(iv) Persons having physical custody of assets must not be permitted to have access to the books of
joint custody for which the daily cash in hand report should be signed by the authorized persons.
accounts.
(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters
(v) There should exist an accounting control in respect of each class of assets, in addition, there
the centre.
should be periodical inspection so as to establish their physical condition.
(vi) Advance booking: If advance booking of facility is made available, the system should ensure
(vi) Mechanical devices should be used, where ever practicable to prevent loss or misappropriation of cash.
that all advance booked tickets are paid for.
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(vii) Budgetary control should be exercised and wide deviations observed should be reconciled. • The subjectivity and complexity of determining estimated amounts, such as fair value accounting
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, estimates.
and it should be done by staff belonging to several sections of the organization. • The financial statement amounts exposed to the deficiencies.
(ix) The financial and administrative powers should be distributed very judiciously among different • The volume of activity that has occurred or could occur in the account balance or class of transactions
officers and the manner in which those are actually exercised should be reviewed periodically. exposed to the deficiency or deficiencies.
(x) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
Question 8
While conducting statutory audit of MPT Limited, a listed company, CA Z has understood
Question 7 various IT controls relating to data centre and network operations, system software acquisition,
During the course of the audit of Tirthankara Limited, CA. Shreyansh Manager in the audit change and maintenance, program change, access security and application system acquisition,
team identified that there is significant risk in lease transactions due to complex cross-border development and maintenance operating in the company. Besides, he has also gained knowledge
sale and lease back arrangements. This significant risk or risk of material misstatement was not of application controls designed to ensure the integrity of accounting records.
identified in management’s risk assessment process. Upon various inquiries with Management Which one of the internal control components of the company is referred to in the above
regarding their risk assessment process, it was identified and concluded by the audit team that description? Besides activities gathered from the above description, give examples of any other
the management’s risk assessment process is not effective to identify all the significant risks. CA. two activities relevant for an audit included in the above identified “component of internal
Shreyansh decided that this in combination with other potential deficiencies in internal control control” of the company. (MTP 4 Marks Oct ‘23)
constitutes significant deficiencies in internal control and hence, is required to be communicated Answer 8
to those charged with governance. However, the engagement partner had a different view
CA Z has gained an understanding of various IT controls operating in the company including General
regarding the audit of Tirthankara Limited. According to him, the only matter that is identified
IT controls and application controls. Such activities form part of “control activities”, which is one of
and poses significant deficiencies due to their magnitude is only required to be communicated.
the components of internal control of an organization.
Matters of potential misstatements that are not actual misstatements cannot be termed as
significant deficiencies. You are required to guide CA. Shreyansh with respect to examples of Control activities are the policies and procedures that help ensure management directives are carried
matters that the auditor may consider in determining whether a deficiency or combination of out. Control activities, whether within IT or manual systems, have various objectives and are applied
deficiencies in internal control constitutes a significant deficiency. (MTP 4 Marks Oct ‘22) at various organisational and functional levels. Examples of specific control activities include those
relating to the following:
Answer 7
Performance reviews
As per SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management”, significant deficiency in internal control is defined as a deficiency or combination of These control activities include reviews and analyses of actual performance versus budgets, forecasts,
deficiencies in internal control that, in the auditor’s professional judgment, is of sufficient importance and prior period performance; relating different sets of data – operating or financial – to one another,
to merit the attention of those charged with governance. Also, the significance of a deficiency together with analyses of the relationships and investigative and corrective actions; comparing internal
or a combination of deficiencies in internal control depends not only on whether a misstatement data with external sources of information; and review of functional or activity performance.
has actually occurred but also on the likelihood that a misstatement could occur and the potential Physical controls
magnitude of the misstatement. Significant deficiencies may therefore exist even though the auditor
Controls that encompass:
has not identified misstatements during the audit. Examples of matters that the auditor may consider
in determining whether a deficiency or combination of deficiencies in internal control constitutes a • The physical security of assets, including adequate safeguards such as secured facilities over access
significant deficiency include: to assets and records.
• The likelihood of the deficiencies leading to material misstatements in the financial statements in • The periodic counting and comparison with amounts shown on control records (for example,
the future. comparing the results of cash, security and inventory counts with accounting records).
• The susceptibility to loss or fraud of the related asset or liability.
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Question 9 • Management’s consideration that the cost of an internal control does not exceed the expected
Prabhu Ltd., a manufacturing concern wants to develop internal control system. You are an benefits to be derived.
expert in developing the internal control system, hereby called to brief about the same. In view • The fact that most internal controls do not tend to be directed at transactions of unusual nature.
of above, you are required to brief about internal control system and inherent limitations of the The potential for human error, such as, due to carelessness, distraction, mistakes of judgement and
internal control? (RTP May 18) misunderstanding of instructions.
Answer 9 • The possibility of circumvention of internal controls through collusion with employees or with
Internal Control System and its Inherent Limitations: As per Guidance Note on Audit of Internal parties outside the entity.
Financial Control over Financial Reporting, internal controls are a system consisting of specific • The possibility that a person responsible for exercising an internal control could abuse that
policies and procedures designed to provide management with reasonable assurance that the goals responsibility, for example, a member of management overriding an internal control.
and objectives it believes important to the entity will be met. • Manipulations by management with respect to transactions or estimates and judgements required
“Internal Control System” means all the policies and procedures (internal controls) adopted by in the preparation of financial statements.
the management of an entity to assist in achieving management’s objective of ensuring, as far as
practicable, the orderly and efficient conduct of its business, including adherence to management
policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and Question 10
completeness of the accounting records, and the timely preparation of reliable financial information. During the course of audit of Treasure Ltd., CA Gautam is concerned with the quality and
To state whether a set of financial statements presents a true and fair view, it is essential to benchmark effectiveness of internal control. Towards achieving his objective, he wants to assess and evaluate
and check the financial statements for compliance with the framework. The Accounting Standards the control environment. Guide CA Gautam with well-defined set of the Standard Operating
specified under the Companies Act, 1956 (which are deemed to be applicable as per Section 133 of the Procedures in the assessment and evaluation of control. (RTP May ’23, PYP 5 Marks, May ’19,
2013 Act, read with Rule 7 of Companies (Accounts) Rules, 2014) is one of the criteria constituting PYP 5 Marks Dec’21)
the financial reporting framework on which companies prepare and present their financial statements
Answer 10
under the Act and against which the auditors evaluate if the financial statements present a true and
fair view of the state of affairs and the results of operations of the company in an audit of the financial Guidance to CA Gautam with well defined set of Standard Operating Procedure is given hereunder:
statements carried out under the Act. (i) Standard Operating Procedures (SOPs): A well defined set of SOPs helps define role,
The fundamental therefore is that effective internal control is a process effected by people that supports responsibilities, process & controls & thus helps clearly communicate the operating controls
the organization in several ways, enabling it to provide reasonable assurance regarding risk and to to all touch points of a process. The controls are likely to be clearly understood & consistently
assist in the achievement of objectives. applied even during employee turnover.
Fundamental to a system of internal control is that it is integral to the activities of the company, and (ii) Enterprise Risk Management: An organization which has robust process to identify & mitigate
not something practiced in isolation. risks across the enterprise & its periodical review will assist in early identification of gaps &
taking effective control measures. In such organizations, surprises of failures in controls is likely
An internal control system:
to be few.
• Facilitates the effectiveness and efficiency of operations.
(iii) Segregation of Job Responsibilities: A key element of control is that multiple activities in a
• Helps ensure the reliability of internal and external financial reporting. transaction/decision should not be concentrated with one individual. Segregation of duties is an
• Assists compliance with laws and regulations. important element of control such that no two commercial activities should be conducted by the
same person.
• Helps safeguarding the assets of the entity.
A buyer should not be involved in receiving of materials or passing of bills. Similarly bank
Limitations of Internal Control - Internal control, no matter how effective, can provide an entity
reconciliation should be prepared by a person other than the one who maintains bank book
with only reasonable assurance and not absolute assurance about achieving the entity’s operational,
financial reporting and compliance objectives. Internal control systems are subject to certain inherent (iv) Job Rotation in Sensitive Areas: Any job carried out by the same person over a long period
limitations, such as: of time is likely to lead to complacency & possible misuse in sensitive areas. It is therefore

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important that in key commercial functions, the job rotation is regularly followed to avoid (i) Evidence of ineffective aspects of the control environment, such as:
degeneration of controls. For example, if the same buyer continues to conduct purchase function (a) Indications that significant transactions in which management is financially interested are
for long period, it is likely that he gets into comfort zone with existing vendors & hence does not not being appropriately scrutinised by those charged with governance.
exercise adequate controls in terms of vendor development, competitive quotes etc.
(b) Identification of management fraud, whether or not material, that was not prevented by the
(v) Delegation of Financial Powers Document: As the organization grows, it needs to delegate entity’s internal control.
the financial & other powers to their employees. A clearly defined document on delegation of
(c) Management’s failure to implement appropriate remedial action on significant deficiencies
powers allows controls to be clearly operated without being dependent on individuals.
previously communicated.
(vi) Information Technology based Controls: With the advent of computers & enterprise resource
(ii) Absence of a risk assessment process within the entity where such a process would ordinarily be
planning (ERP) systems, it is much easier to embed controls through the system instead of being
expected to have been established.
human dependent. The failure rate for IT embedded controls is likely to be low, is likely to have
better audit trail & is thus easier to monitor. For example, at the stage of customer invoicing, (iii) Evidence of an ineffective entity risk assessment process, such as management’s failure to
application of correct rates in invoices or credit control can all be exercised directly through IT identify a risk of material misstatement that the auditor would expect the entity’s risk assessment
system improving control environment. process to have identified.
(iv) Evidence of an ineffective response to identified significant risks (e.g., absence of controls over
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: such a risk).
Standard Operating Procedure : Majority of the examinees lack knowledge of Standard Operating (v) Misstatements detected by the auditor’s procedures that were not prevented, or detected and
Procedures of assessment and evaluation of control. Therefore, failed to answer correctly. corrected, by the entity’s internal control.
(vi) Disclosure of a material misstatement due to error or fraud as prior period items in the current
Dec’21-
year’s Statement of Profit and Loss.
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: (vii) Evidence of management’s inability to oversee the preparation of the financial statements.
Standard Operating Procedures in the assessment and evaluation of control: Many examinees
discussed the concept of internal control and various areas in which internal controls are required
Question 12
to be implemented instead of mentioning a well -defined set of the Standard Operating Procedures
in the assessment and evaluation of control. In the use of standardized Internal Control Questionnaire (ICQ), certain basic assumptions
about elements of a good internal control system are taken into account. List down few such
Question 11 assumptions. (MTP 4 Marks, Nov ‘18)
Auditors are required to obtain an understanding of internal control relevant to the audit when Answer 12
identifying and assessing its effectiveness and risk of material misstatement. During the audit Basic Assumption about Elements of Good Control in Standardized Internal Control Questionnaire:
of Acharya Ltd., you observed that significant deficiency exists in the internal control system, In the use of standardized internal control questionnaire, certain basic assumptions about elements of
and you want to ascertain the same. Elucidate the various indicators of significant deficiencies good control are taken into account. These are -
which will help you in assessing the efficiency of internal control system of the organization.
(i) Certain procedures in general used by most business concerns are essential in achieving reliable
(RTP May ’23, PYP 5 Marks Jan’21)
internal control. This is a time-tested assumption. Deposit into bank of the entire receipts of a
Answer 11 day or daily balancing of the cash book and ledgers or periodic reconciliation with the control
In the given case of Acharya Ltd, Auditors, while conducting audit has come across significant accounts are examples of widely used practices which are considered good internal control
deficiency existing in the internal control system and also auditors wanted to ascertain that deficiency. practices.
As per SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance Besides, basic operations giving rise to these practices exist in all businesses irrespective of their
and Management “, Indicators of significant deficiencies in internal control include, for example: nature.

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(ii) Organizations are such that permit an extensive division of duties and responsibilities. The larger • General monitoring controls (such as oversight of management).
the organization, the greater is the scope of such division. • Controls over the prevention and detection of fraud.
(iii) Employees concerned with accounting function are not assigned any custodial function. • Controls over the selection and application of significant accounting policies.
(iv) No single person is thrust with the responsibility of completing a transaction all by himself. • Controls over significant transactions with related parties.
(v) There should always be evidence to identify the person who has done the work whether involving • Controls over significant transactions outside the entity’s normal course of business.
authorization, implementation or checking.
• Controls over the period-end financial reporting process (such as controls over nonrecurring journal entries).
(vi) The work performed by each one is expected to come under review of another in the usual course
(7) The cause and frequency of the exceptions detected as a result of the deficiencies in the controls.
of routine.
(8) The interaction of the deficiency with other deficiencies in internal control.
(vii) There is proper documentation and recording of the transactions.
Question 14
Question 13
One of the objectives of Internal control relating to accounting system is that all transactions are
CA. N has been appointed as an auditor of TRP Ltd. While conducting the audit he has
promptly recorded in an appropriate manner to permit the preparation of financial information
identified some deficiencies in the Internal control. He needs to determine whether a deficiency
and to maintain accountability of assets. To achieve this objective, certain matters should be
or combination of deficiencies in internal control constitutes a “significant deficiency” and has
ensured by accounting controls. List down matters to be ensured by accounting controls. (PYP
to communicate them in writing to those charged with Governance and management on a timely
5 Marks July 21, MTP 5 Marks Sep’23)
basis.
Answer 14
Guide CA. N with some examples of matters to be considered while determining ‘significant
deficiency’ in internal control with reference to relevant SA. (PYP 5 Marks, Nov ‘20) Matters to be ensured by accounting controls -
Answer 13 Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are -
As per SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management”, significant deficiency in internal control means a deficiency or combination of (i) Transactions are executed in accordance with management’s general or specific authorisation;
deficiencies in internal control that, in the auditor’s professional judgement, is of sufficient importance (ii) Transactions and other events are real & promptly/timely recorded at correct amounts;
to merit the attention of those charged with governance.
(iii) Transactions should be classified in appropriate accounts and in the appropriate period to which
Examples of matters that CA N, auditor of TRP Ltd may consider in determining whether a deficiency it relates;
or combination of deficiencies in internal control constitutes a significant deficiency include:
(iv) Transactions are properly posted.
(1) The likelihood of the deficiencies leading to material misstatements in the financial statements in
(v) Transactions should be recorded in a manner so as to facilitate preparation of financial statements
the future.
in accordance with applicable accounting standards, other accounting policies and practices and
(2) The susceptibility to loss or fraud of the related asset or liability. relevant statutory requirements;
(3) The subjectivity and complexity of determining estimated amounts, such as fair value accounting (vi) Transactions are properly disclosed.
estimates.
(vii) Recording of transactions should facilitate maintaining accountability for assets;
(4) The financial statement amounts exposed to the deficiencies.
(viii) Assets and records are required to be protected from unauthorized access, use or disposition;
(5) The volume of activity that has occurred or could occur in the account balance or class of
(ix) Records of assets, such as sufficient description of the assets (to facilitate identification, its
transactions exposed to the deficiency or deficiencies.
location should also be maintained, so that the assets could be physically verified periodically.
(6) The importance of the controls to the financial reporting process; for example:
(x) Transactions are properly summarized.

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Question 16
While evaluating the risks and controls at entity level, the Auditor should take cognizance of
Few examinees mentioned internal control objectives instead of accounting control objectives. the prevalent direct and indirect entity level controls operating in the entity. Explain what they
pertain to, with few examples. . (PYP 4 Marks, May ’18, PYP 4 Marks Nov’22)
Question 15
Answer 16
Mr. K has been appointed as statutory auditor of SK Limited for issuing an audit opinion on
financial statements and internal controls over financial reporting (ICFR) for the year ended Entity Level Risks and Controls: There are direct entity level controls and indirect entity level controls.
March 31, 2022 under the Companies Act, 2013. Guide Mr. K to prepare a checklist in the form (i) Direct ELCs operate at a level higher than business activity or transaction level such as a business
of Questions for testing internal control over cash and bank balances. When forming an opinion process or sub-process level, account balance level, at a sufficient level of precision, to prevent,
on ICFR is it necessary for Mr. K to test the transactions only at the balance sheet date? (PYP detect or correct a misstatement in a timely manner.
5 Marks May ‘22) Examples include:
Answer 15 • Business performance reviews;
In the given case of SK Limited, the appointed auditor Mr. K would prepare checklist for testing • Monitoring of effectiveness of controls activities by Internal Audit function;
internal control over cash and bank balances. An illustrative set of Questions to be Answered by the
(ii) Indirect ELCs do not relate to any specific business process, transaction or account balance and
audit staff is as follows:
hence, cannot prevent or detect misstatements. However, they contribute indirectly to the effective
Have you checked that the cashier - operation of direct ELC and other control activities.
(i) is not responsible for opening the incoming mails; Examples include:
(ii) does not authorise any of the ledgers; • Company code of conduct and ethics policies;
(iii) does not authorise any expenditure or receipt; • Human resource policies;
(iv) does not sign cheques; • Employee job roles & responsibilities.
(v) takes his annual leave regularly;
(vi) inks and balances the cash book every day; EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
(vii) verifies physical cash balance with the book figure daily at the end of the day; Entity Level Risks and Control: It seems that examinees were unaware of the topic. Very few
(viii)prepares monthly bank reconciliation statement; examinees could comprehend and explain Direct ELCs and indirect ELCs with examples. Some
examinees misunderstood the question and explained wrongly the types of audit Risk Viz., Inherent
(ix) holds no other funds or investment; Risk, Control Risk, Detection Risk.
(x) holds no unnecessary balance in hand;
Question 17
(xi) does not pay money without looking into compliance with proper procedure and due authorisation;
and Explain the concept of Integrated framework issued by Committee of the Sponsoring
Organizations of the Tredway Commission (COSO Framework) duly mentioning its four out of
(xii) has tendered proper security or has executed a fidelity bond? five components and discuss the three category of objectives that can be achieved as per COSO
In the given situation, Mr. K is Statutory Auditor of SK Limited for issuing opinion on financial framework. (PYP 5 Marks, Jan ‘21)
statements and internal control over financial reporting. He should surely test transactions during Answer 17
the financial year and not just as at the balance sheet date, though the extent of testing at or near the
balance sheet date may be higher. From the discussion given above, it can be concluded that it would Concept of COSO:
not be necessary for Mr. K to test the transactions only at the balance sheet date. COSO’s Internal Control – Integrated Framework was introduced in 1992 as guidance on how to
establish better controls so companies can achieve their objectives. COSO categorizes entity-level
objectives into operations, financial reporting, and compliance. The framework includes more than 20
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basic principles representing the fundamental concepts associated with its five components: control Question 2
environment, risk assessment, control activities, information and communication, and monitoring. Chandana Private Limited is engaged in trading of parts of machineries used in boiler plants.
Some of the principles include key elements for compliance, such as integrity and ethical values,
Company has seen growth of 58% in the sales and management expecting similar growth in
authorities and responsibilities, policies and procedures, and reporting deficiencies.
next 3 financial years and is planning to onboard new dealers in order to achieve management
Five Components of COSO are as follows: goal.
(i) Control Environment Purchase department also expects to develop new suppliers in order to meet customer demands.
(ii) Risk Assessment Internal auditor of the company has identified frequent changes in the bank account and other
(iii) Control Activities master details of suppliers. At this expansion planning phase, company has no defined control to
(iv) Information and Communication provid e assurance on said supplier master changes. Management agreed to develop the process
of monthly detailed review of supplier master changes done in supplier master by Finance
(v) Monitoring assistant in order to ensure authorized changes in supplier master.
The COSO Framework is designed to be used by organizations to assess the effectiveness of the One of the members from the Management would like to know that above controls falls under
system of internal control to achieve objectives as determined by management. The Framework lists which category:
three categories of objectives as below:
(a) Automated control.
1. Operations Objectives – related to the effectiveness and efficiency of the entity’s operations,
including operational and financial performance goals, and safeguarding assets against loss. (b) Preventive control.
2. Reporting Objectives – related to internal and external financial and non-financial reporting (c) Detective control.
to stakeholders, which would encompass reliability, timeliness, transparency, or other terms as (d) Compensating control. (MTP 1 Mark Oct 22)
established by regulators, standard setters, or the entity’s policies. Ans: (c)
3. Compliance objectives – In the Framework, the compliance objective was described as “relating
to the entity’s compliance with applicable laws and regulations.” The Framework considers the
increased demands and complexities in laws, regulations, and accounting standards. Question 3
Factors that the auditor may consider in determining the appropriate level of detail for
communication of significant deficiencies under SA 265 depends upon:
MULTIPLE CHOICE QUESTIONS (MCQS)
I. Nature, size and complexity of the entity
Question 1
II. Nature of the significant deficiencies identified
Which of the following is an example of Direct Entity level control
III. Estimated time required by management to resolve the deficiency
(a) Company code of conduct and ethics policies.
IV. Fees charged from the client
(b) Human resource policies.
(a) I and II.
(c) Job roles & responsibilities of employees.
(b) I, II and III.
(d) Monitoring of effectiveness of controls activities by Internal Audit function. (MTP 1 Mark March
(c) III and IV.
22, MTP 1 Mark Mar’23)
(d) Only II. (MTP 1 Mark Oct 21)
Ans: (d)
Ans: (a)

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Question 4 (c) The turnover of ABC Pvt Ltd is below required threshold but loan amount was above required
The management of Prabhu Ltd. has developed a strong internal control in its accounting system threshold. Irrespective of the fact that loan was outstanding as at 31 March 2018 or not, IFC
in such a way that the work of one person is reviewed by another. Since no individual employee would be applicable.
is allowed to handle a task alone from the beginning to the end, the chances of early detection (d) In the given case because of the repayment of the loan before year end i.e. 31 March 2018,
of frauds and errors are high. CA. Viharsh has been appointed as an auditor of the company applicability of IFC becomes optional. (RTP May 19, MTP 1 Mark Mar’23)
for current Financial Year 2022-23. Before starting the audit, she wants to evaluate the internal Ans: (c)
control system of Prabhu Ltd. To facilitate the accumulation of the information necessary for the
proper review and evaluation of internal controls, CA. Viharsh decided to use internal control
questionnaire to know and assimilate the system and evaluate the same. Which of the following Question 7
questions need not be framed under internal control questionnaire relating to purchases?
COBIT is________________________________
(a) Are authorized signatories for purchases limited to elected officials?
(a) best practice IT governance and management framework published by Information Systems Audit
(b) Are payments approved only on original invoices? and Control Association (ISACA). It provides the required tools, resources and guidelines that are
(c) Does authorized officials thoroughly review the documents before signing cheques? relevant to IT governance, risk, compliance and information security.
(d) Are monthly bank reconciliations implemented for each and every bank account of the company? (b) one of the most popular frameworks for improving critical infrastructure cyber security published
(MTP 1 Mark Sep ’23) by National Institute of Standards and Technology (NIST).
Ans: (d) (c) the most widely adopted information security standard for the payments card industry issued by
Payment Card Industry Security Standards Council (PCI SSC).
(d) set of best practice processes and procedures for IT services management in a company like
Question 5 change management, incident management, problem management, IT operations and IT asset
Which of the following is an example of Direct Entity level control management in accordance with ISO 20000. (MTP 1 Mark Oct ’23)
(a) Ethics policy Ans: (a)
(b) Human resource policy
(c) Business performance reviews
(d) Job roles & responsibilities of employees (MTP 1 Mark Mar’22, RTP May 19)
Ans: (c)
Question 6
ABC Pvt Ltd had turnover of ` 39 crores as at 31 March 2018. The Company had taken a loan
of ` 39 crores from various banks and financial institutions during the year ended 31 March
2018. These loans were paid by the Company before 31 March 2018. The Company is of the
view that the auditors’ reporting on adequacy and operating effectiveness of internal financial
controls (IFC) under Section 143(3)(i) of the Companies Act, 2013 would not be required. The
auditors of the Company have a different view. What should be correct option?
(a) The turnover of ABC Pvt Ltd is below required threshold and hence IFC will not be applicable.
(b) The turnover of ABC Pvt Ltd is below required threshold and loan amount was fully paid before
year end i.e. 31 March 2018. Hence IFC will not be applicable.
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SA 320 – Materiality in Planning and Performing an Audit the benchmark on the basis of which he performs his audit procedure. If, in the specific circumstances
of the entity, there is one or more particular classes of transactions, account balances or disclosures
Question 1
for which misstatements of lesser amounts than the materiality for the financial statements as a whole
Mr. X was appointed as the auditor of M/s Easy go Ltd. and intends to apply the concept of could reasonably be expected to influence the economic decisions of users taken on the basis of the
materiality for the financial statements as a whole. Please guide him as to the factors that may financial statements, the auditor shall also determine the materiality level or levels to be applied to
affect the identification of an appropriate benchmark for this purpose. (MTP 5 Marks, Aug 18) those particular classes of transactions, account balances or disclosures.
Answer 1 The auditor shall revise materiality for the financial statements in the event of becoming aware of
SA 320 “Materiality in Planning and Performing an Audit” prescribes the use of Benchmarks in information during the audit that would have caused the auditor to have determined a different amount
Determining Materiality for the Financial Statements as a Whole. (or amounts) initially.
Determining materiality involves the exercise of professional judgment. A percentage is often applied If the auditor concludes a lower materiality for the same, then he should consider the fact that whether
to a chosen benchmark as a starting point in determining materiality for the financial statements as a it is necessary to revise performance materiality and whether the nature, timing and extent of the
whole. Factors that may affect the identification of an appropriate benchmark include the following: further audit procedures remain appropriate.
(i) The elements of the financial statements (for example, assets, liabilities, equity, revenue, Thus, Yashu & Co. can re-evaluate the materiality concepts after considering the necessity of such
expenses); revision.
(ii) Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets); Revaluation of Materiality Concept: Examinees failed to discuss that auditor shall determine the
materiality level to be applied to particular classes of transactions, account balances or disclosures
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry and economic
and the auditor should consider to revise performance materiality and whether the nature, timing
environment in which the entity operates;
and extent of audit procedures are appropriate.
(iv) The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them, Question 3
than on the entity’s earnings); and CA. B was appointed as the auditor of ABC Limited for the financial year 22032.2D-uring
(v) The relative volatility of the benchmark. the course of planning for the audit, CA. B intends to apply the concept of materiality for the
financial statements as a whole. Please guide him with respect to tractors that may affect the
identification of an appropriate benchmark for this purpose.
Question 2
What benchmark should be adopted by CA. B, if ABC Limited is engaged in:
Yashu & Co., Chartered Accountants have come across in the course of audit of a company that
(i) the manufacture and sale of air conditioners and is having regular profits.
certain machinery had been imported for production of new product. Although the Auditors
have applied the concept of materiality for the Financial Statements as a whole, they now want (ii) the construction of large infrastructure projects and incurred losses in the previous two
to re - evaluate the materiality concept for this transaction involving foreign exchange. Give financial years, due to pandemic. (New SM, PYP 5 Marks Nov 22)
your views in this regard. (MTP 5 Marks, April 19, Old SM, PYP 5 Marks, May 18) Answer 3
Answer 2 Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole: As per SA
Re-evaluation of the Materiality Concept: In the instant case, Yashu & Co., as an auditor has applied 320, determining materiality involves the exercise of professional judgment. A percentage is often
the concept of materiality for the financial statements as a whole. But they want to re - evaluate the applied to a chosen benchmark as a starting point in determining materiality for the financial statements
materiality concept on the basis of additional information of import of machinery for production of as a whole.
new product which draws attention to a particular aspect of the company’s business. Factors that may affect the identification of an appropriate benchmark include the following:
As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall audit • The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
strategy, the auditor shall determine materiality for the financial statement as a whole. He should set
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• Whether there are items on which the attention of the users of the particular entity’s financial Question 2
statements tends to be focused (for example, for the purpose of evaluating financial performance “Performance materiality” means the amount or amounts set by the auditor at than materiality
users may tend to focus on profit, revenue or net assets); for the financial statements as a whole to reduce to an appropriately low level the probability
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic that the aggregate of uncorrected and undetected misstatements _________ materiality for the
environment in which the entity operates; financial statements as a whole.
• The entity’s ownership structure and the way it is financed (for example, if an entity is financed (a) higher, exceeds.
solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than (b) less, exceeds.
on the entity’s earnings); and
(c) less, falls below.
• The relative volatility of the benchmark.
(d) higher, falls below. (MTP 1 Mark Oct ’23)
Determining a percentage to be applied to a chosen benchmark involves the exercise of professional
Ans: (b)
judgment. There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher than a
percentage applied to total revenue.
In case if ABC Limited is engaged in manufacture and sale of air conditioner, and is having regular
profits: CA. B, the auditor may consider profit before tax /Earnings.
In case if ABC Limited is engaged in the construction of large infrastructure projects and incurred
losses in the previous two financial years, due to pandemic: CA. B, the auditor may consider Revenue
or Gross Profit as benchmarking. Alternatively, CA B, the auditor may consider the criteria relevant
for audit of the entities doing public utility programs/ projects, Total cost or net cost (expenses less
revenues or expenditure less receipts) may be appropriate benchmarks for that particular program/
project activity. Where an entity has custody of the assets, assets may be an appropriate benchmark.

Question 1
The amount of materiality initially determined needs to be revised as the audit progresses:
(a) If there is a delay in the audit.
(b) In the event of becoming aware of information during the audit that would have caused the auditor
to have determined a different amount (or amounts) initially.
(c) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a higher amount (or amounts) initially.
(d) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a lower amount (or amounts) initially. (MTP 1 Mark April 22)
Ans: (b)

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Question 1 revenues or expenditure less receipts) may be appropriate benchmarks for that particular program/
CA. B was appointed as the auditor of ABC Limited for the financial year 22032.2D-uring project activity.
the course of planning for the audit, CA. B intends to apply the concept of materiality for the Where an entity has custody of the assets, assets may be an appropriate benchmark.
financial statements as a whole. Please guide him with respect to tractors that may affect the
identification of an appropriate benchmark for this purpose.
Question 2
What benchmark should be adopted by CA. B, if ABC Limited is engaged in:
What are the components of an internal control framework?
(i) the manufacture and sale of air conditioners and is having regular profits.
Answer 2
(ii) the construction of large infrastructure projects and incurred losses in the previous two
financial years, due to pandemic. There are five components of an internal control framework. They are as follows:
Answer 1 • Control Environment;
Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole: As per SA • Risk Assessment;
320, determining materiality involves the exercise of professional judgment. A percentage is often • Information & Communication;
applied to a chosen benchmark as a starting point in determining materiality for the financial statements
• Monitoring;
as a whole.
• Control Activities.
Factors that may affect the identification of an appropriate benchmark include the following:
• The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
Question 3
• Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial performance During the course of his audit, the auditor noticed material weaknesses in the internal control
users may tend to focus on profit, revenue or net assets); system and he wishes to communicate the same to the management. You are required to elucidate
the important points the auditor should keep in the mind while drafting the letter of weaknesses
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic
in internal control system.
environment in which the entity operates;
Answer 3
• The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265, “Communicating
on the entity’s earnings); and Deficiencies in Internal Control to Those Who Charged with Governance and Management”, the
auditor shall include in the written communication of significant deficiencies in internal control -
• The relative volatility of the benchmark.
(i) A description of the deficiencies and an explanation of their potential effects; and
Determining a percentage to be applied to a chosen benchmark involves the exercise of professional
judgment. There is a relationship between the percentage and the chosen benchmark, such that a (ii) Sufficient information to enable those charged with governance and management to understand
percentage applied to profit before tax from continuing operations will normally be higher than a the context of the communication.
percentage applied to total revenue. In other words, the auditor should communicate material weaknesses to the management or the audit
In case if ABC Limited is engaged in manufacture and sale of air conditioner, and is having regular committee, if any, on a timely basis. This communication should be, preferably, in writing through a
profits: letter of weakness or management letter. Important points with regard to such a letter are as follows-
CA. B, the auditor may consider profit before tax /Earnings. (1) The letter lists down the area of weaknesses in the system and offers suggestions for improvement.
In case if ABC Limited is engaged in the construction of large infrastructure projects and incurred (2) It should clearly indicate that it discusses only weaknesses which have come to the attention of
losses in the previous two financial years, due to pandemic: CA. B, the auditor may consider Revenue the auditor as a result of his audit and that his examination has not been designed to determine the
or Gross Profit as benchmarking. Alternatively, CA B, the auditor may consider the criteria relevant adequacy of internal control for management.
for audit of the entities doing public utility programs/ projects, Total cost or net cost (expenses less
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(3) This letter serves as a valuable reference document for management for the purpose of revising Question 5
the system and insisting on its strict implementation. As auditor of Z Ltd., you would like to limit your examination of account balance tests. What
(4) The letter may also serve to minimize legal liability in the event of a major defalcation or other are the control objectives you would like the accounting control system to achieve to suit your
loss resulting from a weakness in internal control. purpose?
Answer 5
Question 4 Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are -
Explain briefly the Flow Chart technique for evaluation of the Internal Control system.
(i) Whether all transactions are recorded;
Answer 4
(ii) Whether recorded transactions are real;
The flow charting technique can also be resorted to for evaluation of the internal control system. As
distinct from a narrative form, it provides the most concise and comprehensive way for reviewing the (iii) Whether all recorded transactions are properly valued;
internal controls and the evaluator’s findings. In a flow chart, narratives, though cannot perhaps be (iv) Whether all transactions are recorded timely;
totally banished are reduced to the minimum and by that process, it can successfully bring the whole
(v) Whether all transactions are properly posted;
control structure, especially the essential parts thereof, in a condensed but wholly meaningful manner.
It gives a bird’s eye view of the system and is drawn up as a result of the auditor’s review thereof. It (vi) Whether all transactions are properly classified and disclosed;
should, however, not be understood that details are not reflected in a flow chart. Every detail relevant (vii) Whether all transactions are properly summarized.
from the control point of view and the details about how an operation is performed can be included in
the flow chart. Essentially a flow chart is a diagram full with lines and symbols and, if judicious use
of them can be made, it is probably the most effective way of presenting the state of internal controls Question 6
in the client’s organization. New Life Hospital is a multi-specialty hospital which has been facing a lot of pilferage and
A properly drawn up flow chart can provide a neat visual picture of the whole activities of the section troubles regarding their inventory maintenance and control. On investigation into the matter, it
or department involving flow of documents and activities. More specifically it can show- was found that the person in charge of inventory inflow and outflow from the store house is also
responsible for purchases and maintaining inventory records. According to you, which basis
(i) at what point a document is raised internally or received from external sources;
system of control has been violated? Also list down the other general conditions pertaining to
(ii) the number of copies in which a document is raised or received; such system which needs to be maintained and checked by the management.
(iii) the intermediate stages set sequentially through which the document and the activity pass; Answer 6
(iv) distribution of the documents to various sections, department or operations; Basic system of Control: Internal Checks and Internal Audit are important constituents of Accounting
(v) checking authorization and matching at relevant stages; Controls. Internal check system implies organization of the overall system of book-keeping and
arrangement of Staff duties in such a way that no one person can carry through a transaction and
(vi) filing of the documents; and
record every aspect thereof.
(vii) final disposal by sending out or destruction.
In the given case of New Life Hospital, the person-in-charge of inventory inflow and outflow from
As a matter of fact, a very sound knowledge of internal control requirements is imperative for, adopting the store house is also responsible for purchases and maintaining inventory records. Thus, one of the
flow-charting technique for evaluation of internal controls; also, it demands a highly analytical mind basic system of control i.e. internal check which includes segregation of duties or maker and checker
to be able to see clearly the inter division of a job and the appropriate control at relevant points. has been violated where transaction processing is allocated to different persons in such a manner that
It has been stated earlier that flow charts should be made section-wise or department-wise. The no one person can carry through the completion of a transaction from start to finish or the work of one
suggestion has been made to ensure readability and intelligibility of the flow charts. person is made complimentary to the work of another person.
The general condition pertaining to the internal check system may be summarized as under-

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(i) No single person should have complete control over any important aspect of the business Inherent risk and Control risk. The relationship can be defined as Risk of material Misstatement =
operation. Every employee’s action should come under the review of another person. Inherent risk X control risk
(ii) Staff duties should be rotated from time to time so that members do not perform the same function Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction, disclosure
for a considerable length of time. towards misstatements which may be either individually or collectively with other Misstatement
(iii) Every member of the staff should be encouraged to go on leave at least once a year. becomes material before considering any related internal control which is 40% in the given case.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of Control risk: it is a risk that there may be chances of material Misstatement even if there is a control
accounts. applied by the management and it has prevented defalcation to 75%.
(v) There should exist an accounting control in respect of each class of assets, in addition, there Hence, control risk is 25% (100%-75%)
should be periodical inspection so as to establish their physical condition. Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10%
(vi) Mechanical devices should be used, where ever practicable to prevent loss or misappropriation Chances of material Misstatement are reduced to 10% by the internal control applied by management.
of cash. Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit procedures
(vii) Budgetary control should be exercised and wide deviations observed should be reconciled. applied, Detection Risk is 100-60=40%
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, In the given case, overall Audit Risk can be reduced up to 4% as follows: Audit Risk: Risk of Material
and it should be done by staff belonging to several sections of the organization. Misstatement X Detection Risk = 10X 40% = 4%
(ix) The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically. Question 8
(x) Procedures should be laid down for periodical verification and testing of different sections of ST Ltd is a growing company and currently engaged in the business of manufacturing of tiles.
accounting records to ensure that they are accurate. The company is planning to expand and diversify its operations. The management has increased
the focus on the internal controls to ensure better governance. The management had a discussion
with the statutory auditors to ensure the steps required to be taken so that the statutory audit is
Question 7
risk based and focused on areas of greatest risk to the achievement of the company’s objectives.
Compute the overall Audit Risk if looking to the nature of business there are chances that Please advise the management and the auditor on the steps that should be taken for the same.
40% bills of services provided would be defalcated, inquiring on the same matter management
Answer 8
has assured that internal control can prevent such defalcation to 75%. At his part the Auditor
assesses that the procedure he could apply in the remaining time to complete Audit gives him The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
satisfaction level of detection of frauds & error to an extent of 60%. Analyze the Risk of Material misstatements whether caused by fraud or errors exist in the financial statements.
Misstatement and find out the overall Audit Risk. This involves the following three key steps:
Answer 7 • Assessing the risks of material misstatement in the financial statements
According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit • Designing and performing further audit procedures that respond to assessed risks and reduce the
in Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an risks of material misstatements in the financial statements to an acceptably low level; and
inappropriate opinion while Financial Statements are materially misstated. • Issuing an appropriate audit report based on the audit findings.
Audit Risk, has two components: Risk of material Misstatement and Detection Risk. The relationship Risk Assessment
can be defined as follows.
The risk assessment phase of the audit involves the following steps:
Audit Risk = Risk of material Misstatement X Detection Risk
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
• Planning the overall engagement;
Misstatement may exist in Financial Statement before start of the Audit. It has two components

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• Performing risk assessment procedures to understand the business and identify inherent and control • If there had been a change in the assessed level of risk;
risks; • Whether conclusions drawn from work performed are appropriate; and
• Identifying relevant internal control procedures and assessing their design and implementation • If any suspicious circumstances have been encountered.
• Any additional risks should be appropriately assessed, and further audit procedures performed as
required.
When all procedures have been performed and conclusions reached:
• Identifying the significant risks that require special audit consideration and those risks for which
• Audit findings should be reported to management and those charged with governance; and
substantive procedures alone are not sufficient;
• An audit opinion should be formed, and a decision made on the appropriate wording for the
• Communicating any material weaknesses in the design and implementation of internal control to
auditor’s report.
management and those charged with governance; and
• Making an informed assessment of the risks of material misstatement at the financial statement
level and at the assertion level. Question 9
Risk Response Y Co. Ltd. has five entertainment centers to provide recreational facilities for public especially for
This phase of the audit is to design and perform further audit procedures that respond to the assessed children and youngsters at 5 different locations in the peripheral of 200 kilometers. Collections
risks of material misstatement and will provide the evidence necessary to support the audit opinion are made in cash.
Some of the matters the auditor should consider when planning the audit procedures include: Specify the adequate system towards collection of money.
• Assertions that cannot be addressed by substantive procedures alone. This can occur where there is Answer 9
highly automated processing of transactions with little or no manual intervention.
Control System over Selling and Collection of Tickets: In order to achieve proper internal control
• Existence of internal control that, if tested, could reduce the need/scope for other substantive over the sale of tickets and its collection by the Y Co. Ltd., following system should be adopted -
procedures.
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a
• The potential for substantive analytical procedures that would reduce the need/scope for other way that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial
types of procedures. numbers should not be repeated during a reasonable period, say a month or year depending on
• The need to incorporate an element of unpredictability in procedures performed. the turnover.
• The need to perform further audit procedures to address the potential for management override of The separate series of the serial should be used for such denomination.
controls or other fraud scenarios. (ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the
The need to perform specific procedures to address “significant risks” that have been identified. 5 centers, preferably through machines. There should be proper control over the keys of the
machines.
Audit procedures designed to address the assessed risks could include a mixture of:
(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with
• Tests of the operational effectiveness of internal control; and
the number of tickets sold. Serial number of tickets for each entertainment activity/denomination
• Substantive procedures such as tests of details and analytical procedures will facilitate the reconciliation.
Reporting (iv) Daily banking: Each day’s collection should be deposited in the bank on next working day of
The final phase of the audit is to assess the audit evidence obtained and determine whether it is the bank.
sufficient and appropriate to reduce the risks of material misstatement in the financial statements to Till that time, the cash should be in the custody of properly authorized person preferably in joint
an acceptably low level. custody for which the daily cash in hand report should be signed by the authorized persons.
It is important at this stage to determine: (v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters
the center.
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(vi) Advance booking: If advance booking of facility is made available, the system should ensure • Consider the nature of the internal control system in place and its possible effectiveness in
that all advance booked tickets are paid for. mitigating the risks involved. Ensure the controls:
(vii) Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the • Routine in nature (occur daily) or periodic such as monthly.
concessional rates, say, for group booking should be properly authorized and signed forms for • Designed to prevent or detect and correct errors.
such authorization should be preserved.
• Manual or automated.
(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts,
• Consider any unique characteristics of the risk.
daily banking, reconciliation and stock of unsold tickets etc.
• Consider the existence of any particular characteristics (inherent risks) in the class of transactions,
account balance or disclosure that need to be addressed in designing further audit procedures.
Question 10
• Examples could include high value inventory, complex contractual agreements, absence of a paper
The effectiveness of controls cannot rise above the integrity and ethical values of the people who trail on certain transaction streams or a large percentage of sales coming from a single customer.
create, administer, and monitor them. Explain.
Answer 10
Question 12
Communication and enforcement of integrity and ethical values: The effectiveness of controls cannot
BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of
rise above the integrity and ethical values of the people who create, administer, and monitor them.
the company for the year 2019-20. In order to review internal controls of the Sales Department
Integrity and ethical behavior are the product of the entity’s ethical and behavioral standards, how they
of the company, you visited the Department and noticed the work division as follows:
are communicated, and how they are reinforced in practice. The enforcement of integrity and ethical
values includes, for example, management actions to eliminate or mitigate incentives or temptations (1) An officer was handling the sales ledger and cash receipts.
that might prompt personnel to engage in dishonest, illegal, or unethical acts. The communication of (2) Another official was handling dispatch of goods and issuance of Delivery challans.
entity policies on integrity and ethical values may include the communication of behavioral standards
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
to personnel through policy statements and codes of conduct and by example
As an internal auditor, you are required to briefly discuss the general condition pertaining to
the internal check prevalent in internal control system. Do you think that there was proper
Question 11 division of work in BSF Limited? If not, why?
Your engagement team is seeking advice from you as engagement partner regarding steps for Answer 12
risk identification. Elaborate.
The general condition pertaining to the internal check system may be summarized as under:
Answer 11
(i) no single person should have complete control over any important aspect of the business
• Assess the significance of the assessed risk, impact of its occurrence and also revise the materiality operation. Every employee’s action should come under the review of another person.
accordingly for the specific account balance.
(ii) Staff duties should be rotated from time to time so that members do not perform the same
• Determine the likelihood for assessed risk to occur and its impact on our auditing procedures. function for a considerable length of time
• Document the assertions that are affected. (iii) Every member of the staff should be encouraged to go on leave at least once a year.
• Consider the impact of the risk on each of the assertions (iv) Persons having physical custody of assets must not be permitted to have access to the books of
• (completeness, existence, accuracy, validity, valuation and presentation) relevant to the account accounts.
balance, class of transactions, or disclosure. (v) There should exist an accounting control in respect of each class of assets, in addition, there
• Identify the degree of Significant risks that would require separate attention and response by the should be periodical inspection so as to establish their physical condition.
auditor. Planned audit procedures should directly address these risks. (vi) Mechanical devices should be used, wherever practicable to prevent loss or misappropriation of
• Enquire and document the management’s response. cash.

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(vii) Budgetary control should be exercised, and wide deviations observed should be reconciled Question 14
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, You have recently been appointed as an auditor of NGO working in the field of “upholding
and it should be done by staff belonging to several sections of the organization. democracy” for the first time. The last year accounts of NGO were unaudited and its activities
(ix) The financial and administrative powers should be distributed very judiciously among different were limited at a small scale. However, it is only in the current year that NGO has received
officers and the manner in which those are actually exercised should be reviewed periodically. substantial donations including foreign funds. The said NGO is also crowdfunding its donations.
The government has now legislative power to cancel FCRA certificate of NGO. Since it is working
(x) Procedures should be laid down for periodical verification and testing of different sections of in field which encompasses political and social fields, accusations and counter-accusations are
accounting records to ensure that they are accurate. flying thick and fast.
In the given scenario, Company has not done proper division of work as: What factors you may consider for assessing audit risk?
(i) the receipts of cash should not be handled by the official handling sales ledger and Answer 14
(ii) delivery challans should be verified by an authorized official other than the officer handling For assessing audit risk, auditor shall consider all components of audit risk. The said NGO is working
dispatch of goods. in a political-cum-social field which can make its activities inherently risky. Crowdfunding donations
may have to be seen in relation to constitution of NGO which may make these risky. Since the NGO is
in receipt of foreign funds, it may make transactions inherently risky. The credibility and integrity of
Question 13
persons behind NGO is important. Shady NGOs can be involved in money laundering activities and
CA. R is conducting statutory audit of a Divisional office (DO) of a public sector insurance may be involved in mis utilizing funds from donors. Since last year accounts were unaudited, it also
company. On going through delegation of powers laid down by company’s head office, it is increases inherent risk due to probable effect of misstatements, if any, of last year. Non-compliance
noticed that surveyors in claims under property insurance policies beyond estimated amounts of with strict laws has the potential to make activities of NGO inherently risky.
₹30 lac are to be appointed by Divisional Claims Committee (DCC). However, ongoing through
Since NGO has received substantial donations in current year and its activities were on a relatively
surveyor appointment details of 10 such claims during the year, 5 instances have come to his
small scale during last year, formal controls may not be in place. Lack of formal controls may lead
notice where above delegation of powers has not been followed and appointments were made by
to noncompliance with laws. Non-compliance with FCRA can have serious consequences including
Divisional manager in place of DCC.
cancelling such certificate of NGO. Therefore, control risk could be high.
In the beginning, the auditor had assessed risks of material misstatement to be low. Describe
Further, audit for NGO has been accepted for the first time. There may be a lack of understanding of
why above finding would change auditor’s assessment in relation to above.
activities of NGO. It may lead to higher detection risk due to inappropriate sampling procedures or
Answer 13 faulty application of audit procedures.
Evaluation of internal controls influences auditor’s assessment of risks of material misstatement.
Risks of material misstatement also consists of control risk.
Question 15
In the given situation of statutory audit of a Divisional office of a public sector insurance company,
it is noticed that procedure relating to delegation of powers has not been followed and surveyor RK Living Limited is engaged in manufacturing and processing of textile fabrics. It purchases
appointments have been made in violation of laid down procedures. It is a serious violation and shows its raw material from a company based in Silvassa taxable @ 12%. It takes about 3-4 days for
that controls are not operating effectively as laid down by company management. raw materials to reach the company’s plant. Recently, the company has revamped its internal
control system for recording its transactions. You have also assumed charge as head of internal
Such deviations from established controls may lead auditor to conclude that control risk needs
audit department of the company few days before.
to be revised. Revision of control risk assessment is likely to lead to revision in risks of material
misstatement. It may also result in modification of nature, timing and extent of planned substantive It is noticed that information system requires booking of purchases in purchase ledger and
procedures. stock records from date of purchase invoice only. How you would deal with above matter as
internal auditor of the company?

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Internal audit involves continuous and critical appraisal of functioning of an entity with a view to CA. S is statutory auditor of a listed company. On reviewing internal controls of the company,
suggest improvements thereto and add value to and strengthen the overall governance mechanism of he is of the view that there can be possible situations where insurance premiums for keeping
the entity including its strategic risk management and internal control system. insurance policies current in respect of various assets of company may have become due and
Internal audit also involves evaluation of internal control to provide assurance to management payable but internal control systems established by the company may not be able to capture it.
regarding design, implementation and operating effectiveness of control. Elaborate how he should proceed to deal with the above matter.
In the given situation, information system requires booking of purchases in purchase ledger and stock Answer 17
records from date of invoice. Such a control system is likely to present a distorted picture of stocks A deficiency in internal control exists when: -
f the company. It would show stocks of raw material as received whereas these goods could be in
(i) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect
transit.
and correct, misstatements in the financial statements on a timely basis or
Therefore, design of the control itself is faulty which allows booking from date of purchase invoice
(ii) A control necessary to prevent, or detect and correct, misstatements in the financial statements on
only.
a timely basis is missing.
Further, such a system can have implications with respect to GST laws.
In above situation, there is a possibility that internal control systems established by the company may
The internal auditor should report above matter asking management for corrective action. not be able to capture insurance premiums which may have become due and payable. It is a significant
deficiency as failure to keep insurance policies current would render assets of the company uninsured.
It may lead to losses for the company in case of any eventuality.
Question 16
Further, in accordance with SA 265, the significance of a deficiency or a combination of deficiencies
A company as part of its internal control set up has a system under which quarterly budgeted
in internal control depends not only on whether a misstatement has actually occurred, but also on
targets in respect of sales are analyzed with respect to actual performance achieved. It also
the likelihood that a misstatement could occur and the potential magnitude of the misstatement.
involves fixing responsibilities of different product departmental heads and taking timely
Significant deficiencies may, therefore, exist even though the auditor has not identified misstatements
correction. In case of product departmental heads not achieving quarterly budgeted targets,
during the audit.
they have to give a detailed justification for the same and also lay down how shortfalls would be
compensated in ensuing quarters. The susceptibility to loss of an asset is a factor in determining whether a deficiency constitutes
significant deficiency in internal control.
Identify and explain component of internal control alluded to in above scenario.
The auditor shall communicate in writing significant deficiency in internal control to those charged
Answer 16
with governance and include in the written communication of significant deficiencies in internal
The above referred component of internal control is “Control activities”. Control activities that may control: -
be relevant to an audit include policies and procedures that pertain to “performance reviews”.
(a) A description of the deficiencies and an explanation of their potential effects and
Such control activities include reviews and analyses of actual performance versus budgets, forecasts,
(b) Sufficient information to enable those charged with governance and management to understand
and prior period performance; relating different sets of data – operating or financial– to one another,
the context of the communication.
together with analyses of the relationships and investigative and corrective actions; comparing internal
data with external sources of information; and review of functional or activity performance.
The control activities pertaining to analysis of budgeted target of sales with respect to actual performance,
fixing of responsibilities and taking timely corrective action falls in nature of performance reviews.
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Case Study 2. The operating expenses of financial ye2ar021-22 and 2022-23 are same. Which of the following
Following is extract of information taken from draft financial statements of Find me Limited engaged statements is most appropriate in overall context of case study?
in manufacturing of bicycles put up before you for audit for year 2022-23: - (₹ In lacs) a) Operating expenses figures of two years can be same. There is no audit risk involved.
Particulars 2022-23 2021-22 b) It is an anomaly. However, there is no audit risk involved.
Revenue from operations 35000 25000 c) There is audit risk that previous year figures need to be revised under Companies Act.
Cost of sales 26950 20000
Gross Profit 8050 5000 d) There is audit risk that previous year figures have been presented in place of current year figures
Operating expenses 3825 3825 in draft financial statements.
Finance costs 225 275 Ans: (d)
Depreciation and amortization expenses 1200 1300
Profit before tax 2800 (400)
Tax expense – current tax 750 0 3. Trade receivables turnover ratio has increased from 1.44months in year 2202 1to- more than
Deferred tax (50) (385) 2 months in year 202-23. Identify the most appropriate statement.
Total tax expense 700 (385)
a) In direct distribution through online platform, trade receivables turnover ratio is estimated to be
Profit after tax 2100 15
high. Therefore, there is no audit risk involved.
Trade receivables 6000 3000
Inventories 10000 6000 b) In direct distribution through online platform, trade receivables turnover ratio should have fallen.
Therefore, there is no audit risk involved.
The company has not made any substantial additions in its plant capacity during year 2022-23. It
has reduced its dealer network and is approaching customers directly using its online platform. c) In direct distribution through online platform, trade receivables turnover ratio should have fallen.
Encouraging response has been received from customers and sales have gathered momentum through It is possible that some of the dealers may not be meeting their commitments of past contracts.
online platform. Therefore, there is audit risk that trade receivables could be undervalued.
You are planning to use analytical procedures as risk assessment procedures. Keeping in view above, d) In direct distribution through online platform, trade receivables turnover ratio should have fallen.
answer the following questions: - It is possible that some of the dealers may not be meeting their commitments of past contracts.
Therefore, there is audit risk that trade receivables could be overvalued.
Ans: (d)
1. The revenue from operations of company has increased by 40% in year -232a2s compared
to last year. There are no additions in plant capacity. Which of the following statements is most
appropriate in this regard? 4. The gross profit ratio of company has increased by 3% during year 220322i-n comparison to
a) There is audit risk that revenue from operations is overstated. last year.
b) There is audit risk that revenue from operations is not overstated. Which of the following statements is most appropriate?
c) There is audit risk that fresh customers of company do not make payments. a) There is audit risk that there is overstatement of cost of sales.
d) There is audit risk that company is overutilizing its plant capacity leading to rapid plant obsolescence. b) There is audit risk that margins with customers may have increased.
Ans: (a) c) There is audit risk that closing inventories may be undervalued.
d) There is audit risk that cost of sales may not be completely recorded.
Ans: (d)

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5. Inventory turnover ratio has increased from 2.88 months in year 2021-22 to about 3.42 months
in year 20222-3. Which of the following statements is likely to be in accordance with overall
context of case study?
a) Revenue jump in current year may have led to need for raising inventory holding levels.
Therefore, there is audit risk pertaining to misstatement of inventories.
b) Raising of inventory levels may raise locked up funds in inventories. There is audit risk that it can
lead to rise in costs.
c) Revenue jump in current year may have led to need for raising inventory holding levels.
However, there is also a risk that some of inventories with dealers could have become obsolete.
It leads to audit risk that inventories may be overvalued.
d) There is audit risk on account of both the factors stated at [b] & [c].
Ans: (c)

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MATERIALITY, RISK ASSESSMENT AND INTERNAL CONTROL
CA Harshad Jaju
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5
CHAPTER
AUDIT
EVIDENCE
SA 500 – Audit Evidence
Question 1
The auditor of CROX Ltd. accepted the gratuity liability valuation based on the certificate
issued by a qualified actuary. However, the auditor noticed that the retirement age adopted is 65
years as against the existing retirement age of 60 years. The company is considering a proposal
to increase the retirement age to 65 years. Comment. (MTP 5 Marks, April 18, 4 Marks, Oct 20)
(PYP 5 Marks ,May 18)
Answer 1
Evaluating the Work of Management’s Expert: As per SA 500 “Audit Evidence”, when information to
be used as audit evidence has been prepared using the work of a management’s expert, the auditor shall,
to the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes,
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
The auditor may obtain information regarding the competence, capabilities and objectivity of a
management’s expert from a variety of sources, such as personal experience with previous work of
that expert; discussions with that expert; discussions with others who are familiar with that expert’s
work; knowledge of that expert’s qualifications; published papers or books written by that expert.
Aspects of the management’s expert’s field relevant to the auditor’s understanding may include what
assumptions and methods are used by the management’s expert, and whether they are generally
accepted within that expert’s field and appropriate for financial reporting purposes.
The auditor may also consider the following while evaluating the appropriateness of the management’s
expert’s work as audit evidence for the relevant assertion:
(i) The relevance and reasonableness of that expert’s findings or conclusions, their consistency
with other audit evidence, and whether they have been appropriately reflected in the financial
statements;
(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods; and
(iii) If that expert’s work involves significant use of source data, the relevance, completeness, and
accuracy of that source data.
CA Harshad Jaju
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AUDIT EVIDENCE AUDIT EVIDENCE
In the instant case, CROX Ltd. accepted the gratuity liability valuation based on the certificate issued (vii) Whether the management’s expert is subject to technical performance standards or other
by an expert i.e., a qualified actuary who is management’s expert. Here basis for computation and professional or industry requirements.
valuation is taken as age 65 years by the actuary, which is not correct as company is considering (viii)The nature and extent of any controls within the entity over the management’s expert’s work.
proposal to increase the retirement age from existing age to 65 years. Therefore, assumptions and
methods used by the management’s expert are not appropriate for financial reporting purposes. Hence,
auditor may qualify the report accordingly.
Question 1
The audit team has obtained the following results from the trade receivables circularization of
Evaluating work of Management’s Expert: Few examinees failed to give required answer Nemi Co for the year ended 31 March 2023.
instead they gave general answers on valuation of inventory.
Balance as
Balance as per
Customer per customer Comment
Question 2 sales ledger
confirmation
ABC Ltd. appointed Mr. Anand for the actuarial calculation of liabilities associated with ₹ ₹
insurance contracts and employee benefit plans. These calculations and valuations are then
AM Co. 2,25,000 2,25,000
adopted by management in preparing the financial statements. Kindly guide Mr Sushil, the
AN Co. 3,50,000 2,75,000 Invoice raised on 29 March 2023
statutory auditor of ABC Ltd, on the use of information prepared by management’s appointed
expert as audit evidence. Also, explain Mr. Sushil the matters that can impact the nature, timing AO Co. 6,20,000 4,80,000 Payment made on 30 March 2023
and extent of audit procedures regarding information to be used as audit evidence which has AP Co. 5,35,000 5,35,000 A balance of ₹ 45,000 is currently being
been prepared using the work of a management’s expert. (MTP 4 Marks Sep ‘23) AR Co. 1,78,000 No reply disputed by AP Co.
Answer 2 Which of the following statements in relation to the results of the trade receivables circularization
As per SA 500, “Audit Evidence”, when information to be used as audit evidence has been prepared is TRUE?
using the work of a management expert, the auditor shall, to the extent necessary, having regard to the (a) No further audit procedures need to be carried out in relation to the outstanding balances with AM
significance of that expert’s work for the auditor’s purposes: Co. and AP Co.
(i) Evaluate the competence, capabilities and objectivity of that expert; (b) The difference in relation to AN Co. represents a timing difference and should be agreed to a pre
(ii) Obtain an understanding of the work of that expert; and - year-end invoice.
(iii) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion. (c) The difference in relation to AO Co. represents a timing difference and should be agreed to pre -
year-end bank statements.
Further, the nature, timing and extent of audit procedures in relation to the requirement relating to
information to be used as audit evidence prepared using the work of a management’s expert may be (d) Due to the non-reply, the balance with AR Co. cannot be verified and a different customer balance
affected by such matters as: should be selected and circularized. (MTP 1 Mark Sep ’23)
(i) The nature and complexity of the matter to which the management’s expert relates. Ans: (b)
(ii) The risks of material misstatement in the matter.

(iii) The availability of alternative sources of audit evidence. Question 2
(iv) The nature, scope and objectives of the management’s expert’s work. You are an audit senior at Ghaisas & Co and are currently performing the final audit of Bingham
(v) Whether the management’s expert is employed by the entity or is a party engaged by it to provide Co. for the year ended 31 March 2018. The company is a manufacturer and retailer of table
relevant services. lamps. The current audit senior is ill, and you have been asked to complete the audit of payroll
in their absence. On arrival at the head office of Bingham Co, you determine the following data
(vi) The extent to which management can exercise control or influence over the work of the from a review of the current year and prior year audit files:
management’s expert.
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• As at 31 March 2017, the company had 350 employees Question 4

• On 1 April 2017, 10% of staff were made redundant, effective immediately, due to discontinuation Andromeda Limited issued a prospectus in respect of an IPO which had the auditor’s report on
of a product line the financial statements for the year ended 31st March, 2021. The issue was fully subscribed.
• On 1 June 2017, all remaining staff received a 5% pay rise During this year, there was an abnormal rise in the profits of the company for which it was
found later that it was because of Dealer dumping technique used by the company to inflate the
• Over the course of the year, sales levels met performance targets which resulted in a fixed bonus sales. Upon further investigation it was identified that the Whole-time director and other top
of Rs.8,000 being paid to each employee on 31 March 2018. officials of the company were involved in the scheme. On discovery of this fact, the company
The following audit evidence has been gathered relating to the accuracy of wages and salaries for offered to refund all moneys to the subscribers of the shares and sued the auditors for the
Bingham Co. damages alleging that the auditors failed to examine and ascertain any satisfactory explanation
(1) Proof in total calculation performed by an audit team member for steep increase in the rate of profits and related accounts.
(2) Written representation from the directors of Bingham Co confirming the accuracy of wages and The company emphasized that the auditor should have proceeded with suspicion and should not
salaries have followed selected verification. In response, the auditors were able to prove that they found
internal controls to be satisfactory based on the samples which were selected for testing design
(3) Verbal confirmation from the finance director of Bingham Co confirming the accuracy of wages
and operating effectiveness and did not find any circumstance to arouse suspicion. Further, they
and salaries
were able to prove to the satisfaction that the sampling performed for substantive procedures
(4) Recalculation of the gross and net pay for a sample of employees by an internal audit team was also appropriate as per sampling guidelines and was sufficient to reflect the population.
member of Bingham Co.
The company was not able to prove that auditors were negligent in performance of their duties.
What is the order of reliability of the audit evidence starting with the MOST RELIABLE first? You are required to advise on the same.
(a) Audit evidence - 1, 2, 3, 4 (a) The stand of the company was correct in this case. Considering the nature of the work, the Auditors
(b) Audit evidence - 1, 4, 2, 3 should have proceeded with suspicion and should not have followed selected verification.
(c) Audit evidence - 4, 1, 2, 3 (b) The approach of the auditors appears to be reasonable in this case. The auditors found internal
controls to be satisfactory and also did not find any circumstance to arouse suspicion and hence
(d) Audit evidence - 4, 1, 3, 2 (MTP 2 Marks, Mar 19)
they performed their procedures on the basis of selected verification.
Ans: (b)
(c) In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts
Question 3 and hence the auditors should also have done that. In the given case, by not involving the experts
the auditors did not perform their job in a professional manner. If they had involved experts like
While investigating the matters relating to possible misappropriation of cash, cashier says that
forensic experts etc, the manipulation could have been detected. Hence the auditors should be
every day cash is counted and reviewed by the Finance Head. Your specimen review indicates
held liable.
that daily cash summary was not signed off by the Finance Head. In this situation you should: -
(d) In case of such type of engagements, the focus is always on the management controls. If the
(a) Conclude that cashier is not telling truth.
controls are found to be effective, then an auditor can never be held liable in respect of any
(b) Consider extending investigation procedures like corroborative enquiry with Finance Head, deficiency or misstatement or fraud.(MTP 1 Mark Nov 21 ,Oct 19 & March 22)
review of appropriate daily cash summaries etc.
Ans: (b)
(c) Conclude that Finance Head is not a responsible person.
(d) Conclude that daily cash summary is not relevant for investigation (MTP 1 Marks, May 20)
Ans: (b)

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Question 5 (a) Auditor should qualify the audit report in respect of differences in book balances of fixed deposits
The audit team has obtained the following results from the trade receivables circularization of vis a vis independent balance confirmations.
Oak Co for the year ended 31 March 2018. (b) Auditor should consider the fixed deposit certificates produced by the management and basis that
Balance as any differences in book balances of fixed deposits vis a vis independent balance confirmations
Balance as per should be ignored.
Customer per customer Comment
sales ledger
confirmation (c) Auditor should consider the documentation provided by the management i.e. the fixed deposit
₹ ₹ certificates, however, independent balance confirmations is also required to be considered by the
M Co. 2,25,000 2,25,000 auditor which shows various difference. The auditor should obtain balance confirmations again.
N Co. 3,50,000 2,75,000 Invoice raised on 29 March 2023 (d) Auditor should consider the documentation provided by the management i.e. the fixed deposit
O Co. 6,20,000 4,80,000 Payment made on 30 March 2023 certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should look to perform alternate procedures
P Co. 5,35,000 5,35,000 A balance of ₹ 45,000 is currently being
and basis that the matter should be looked at. (MTP 2 Marks, April 19)
R Co. 1,78,000 No reply disputed by P Co.
Ans: (d)
Which of the following statements in relation to the results of the trade receivables circularization
is TRUE?
(a) No further audit procedures need to be carried out in relation to the outstanding balances with M Question 7
Co. and P Co. You are the audit manager of Ranker & Co are responsible for the audit work to be managed
(b) The difference in relation to N Co. represents a timing difference and should be agreed to a preyear- for the fixed assets of the company. Ranker & Co has 5 properties amounting to Rs.11.5 crore.
end invoice One of the important tasks ahead for you is to confirm the ownership of these properties.
(c) The difference in relation to O Co. represents a timing difference and should be agreed to preyear Which of the following would provide the most persuasive evidence of the ownership?
end bank statements (a) To conduct a physical inspection of all the properties located at different areas.
(d) Due to the non-reply, the balance with R Co. cannot be verified and a different customer balance (b) To ask the management registration documents of these properties and inspect and verify them.
should be selected and circularized (MTP 1 Marks, April 19 & April 21)
(c) To check whether all the properties are recorded properly in the fixed asset register and depreciation
Ans: (b) has been calculated correctly.
(d) Enquire with the management if these properties are insured and review the insurance
Question 6 documentation. (MTP 1 Marks April 21)
BC Ltd. is the business of manpower consulting. The company has a huge cash and bank balance Ans: (b)
including fixed deposits with banks. During the course of audit of the financial statements of
the company for the year ended 31 March 2017, auditors circulated independent bank balance
Question 8
confirmations. The auditors received all the balance (covering fixed deposits) confirmations
independently. Auditors observed that the fixed deposits balances as per the independent balance Below is an extract from the list of supplier statements as at 31st March 2022 held by the Company
confirmation did not match with the books balances in some cases. Management produced the and corresponding payables ledger balances at the same date along with some commentary on
fixed deposit certificates to the auditors wherein the balances of fixed assets matched with the the noted differences:
balances as per the books. How should the auditor deal with this matter?
Supplier Statement balance `’000 Payables ledger balance `’000
Shubh Company 78 66
Labh Company 235 205

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The difference in the balance of Shubh Company is due to an invoice which is under dispute due to d. In case of such type of engagements, the focus is always on the management controls. If the controls
defective goods which were returned on 30th March 2022. Which of the following audit procedures are found to be effective, then an auditor can never be held liable in respect of any deficiency or
should be carried out to confirm the balance owing to Shubh Company? misstatement or fraud. (MTP 1 Mark March ’23)
(I) Review post year-end credit notes for evidence of acceptance of return. Ans: (b)
(II) Inspect pre year-end goods returned note in respect of the items sent back to the supplier.
(III) Inspect post year-end cash book for evidence that the amount has been settled. Question 10
(a) 1, 2 and 3. You are the audit senior in charge of the audit of Swadhyay Co. and have been informed by your
(b) 1 and 3 only. audit manager that during the current year a fraud occurred at the client. A payroll clerk sets up
fictitious employees and the wages were paid into the clerk’s own bank account. This clerk has
(c) 1 and 2 only.
subsequently left the company, but the audit manager is concerned that additional frauds have ta
(d) 2 and 3 only. (MTP 1 Mark Sep ’22, RTP May’21) ken place in the wages department. Which of the following audit procedures would be undertaken
Ans: (c) during the audit of wages as a result of the manager’s assessment of the increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the financial
impact of amounts incorrectly paid into the payroll clerk’s bank account.
Question 9
(2) Review the supporting documentation to confirm the total of the fraudulent payments made and
JIN Ltd issued a prospectus in respect of an IPO which had the auditor’s report on the financial
assess the materiality of this misstatement.
statements for the year ended 31 March 2022. The issue was fully subscribed.
(3) Review and test the internal controls surrounding setting up of and payments to new joiners to
During this year, there was an abnormal rise in the profits of the company for which i t was found
assess whether further frauds may have occurred.
later on that it was because of manipulated sales in which there was participation of Whole-time
director and other top officials of the company. On discovery of this fact, the company offered (4) Review the legal action taken by the management against the payroll clerk who was involved in
to refund all moneys to the subscribers of the shares and sued the auditors for the damages the fraud and see whether he is punished for his actions.
alleging that the auditors failed to examine and ascertain any satisfactory explanation for steep (a) Audit procedures 1,2,3.
increase in the rate of profits and related accounts.
(b) Audit procedures 2,3,4.
The company emphasized that the auditor should have proceeded with suspicion and should
(c) Audit procedures 1,3,4.
not have followed selected verification. The auditors were able to prove that they found internal
controls to be satisfactory and did not find any circumstance to arouse suspicion. (d) Audit procedures 1,2,4. (MTP 2 Marks Oct’19, MTP 1 Mark April ’23)
The company was not able to prove that auditors were negligent in performance of their duties. Ans: (a)
Which of the following is correct:
a. The stand of the company was correct in this case. Considering the nature of the work, the Auditors Question 11
should have proceeded with suspicion and should not have followed selected verification.
The following inherent limitations in an audit affect the auditor’s ability to detect material
b. The approach of the auditors looks reasonable in this case. The auditors found internal controls to misstatements except:
be satisfactory and also did not find any circumstance to arouse suspicion and hence they performed
a) Test and sampling.
their procedures on the basis of selected verification.
b) Audit process permeated by judgement.
c. In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts and c) Poor corporate governance.
hence the auditors should also have done that. In the given case, by not involving the experts the d) Audit evidence. (MTP 1 Mark Sep ‘22)
auditors did not perform their job in a professional manner. If they had involved experts like forensic
Ans: (c)
experts etc., the manipulation could have been detected. Hence the auditors should be held liable.
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SA 501 – Audit Evidence-Specific Considerations for Selected Items is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory. This should be done by performing various audit
procedures which also includes attending physical count, observing the count, inspecting the inventory
Question 1 and reperforming physical counts.
The Engagement Partner of the audit team of High Inventory Limited assessed that the inventory
is material with respect to the audit of the financial statement for the current period. Upon
Question 2
inquiring with the management, the Engagement Partner identified that the management will
be performing an annual physical inventory count at all the warehouses where the entity stores Your firm has been appointed as the statutory auditors of GBM Private Limited for the financial
and maintains its inventory. Moreover, management confirmed in its written representation year 2018-19. While verification of company’s inventories as on 31st March 2019, you found that the
that they will be performing a 100% physical count of inventory for the current period. significant amount of inventories belonging to the company are held by other parties. However, the
company has kept all the records of the inventories maintained by other parties. What is your duty
As a result, the engagement Partner decided not to perform any physical count of inventory
as an auditor in order to ensure that third parties are not such with whom the stock should not be
as it will be a duplication of the work. Moreover, he decided that the written representation
held and the stock as disclosed in company’s records actually belongs to them? (RTP Nov 19)
from management stating “the inventory exists and is in appropriate physical condition” will
be sufficient and appropriate with respect to audit evidence to conclude that the inventory Answer 2
balance in the financial statement is free from any material misstatement. In the light of SA 501, Inventory under the Custody and Control of a Third Party: As per SA 501, “Audit Evidence—Specific
evaluate whether the decision taken by the Engagement Partner is appropriate or not. (MTP 5 Considerations for Selected Items” when inventory under the custody and control of a third party
Marks Oct ‘22) is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
Answer 1 regarding the existence and condition of that inventory by performing one or both of the following:
As per SA 501,” Audit Evidence - Specific Considerations for Selected Items”, when inventory is (i) Request confirmation from the third party as to the quantities and condition of inventory held on
material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence behalf of the entity.
regarding the existence and condition of inventory by: (ii) Perform inspection or other audit procedures appropriate in the circumstances, for example where
i. Attendance at physical inventory counting, unless impracticable, to information is obtained that raises doubt about the integrity and objectivity of the third party, the
auditor may consider it appropriate to perform other audit procedures instead of, or in addition to,
1. Evaluate management’s instructions and procedures for recording and controlling the results of
confirmation with the third party. Examples of other audit procedures include:
the entity’s physical inventory counting.
• Attending, or arranging for another auditor to attend, the third party’s physical counting of inventory,
2. Observe the performance of management’s count procedures.
if practicable.
3. Inspect the inventory; and.
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third party’s
4. Perform test counts; and internal control for ensuring that inventory is properly counted and adequately safeguarded.
ii. Performing audit procedures over the entity’s final inventory records to determine whether • Inspecting documentation regarding inventory held by third parties, for example, warehouse
they accurately reflect actual inventory count results Attendance at physical inventory counting receipts.
involves:
• Requesting confirmation from other parties when inventory has been pledged as collateral.
iii. Inspecting the inventory to ascertain its existence and evaluate its condition and perform test
counts.
iv. Observing compliance with management’s instructions and the performance of procedures Question 3
v. for recording and controlling the results of the physical inventory count; and RIM Private Ltd is engaged in the business of manufacturing of water bottles and is experiencing
significant increase in turnover year on year. During the financial year ended 31 March 2019,
vi. Obtaining audit evidence as to the reliability of management’s count procedures.
the company carried out a detailed physical verification of its inventory and property, plant and
Hence in the given case, the approach of Engagement Partner is not appropriate as when inventory equipment. You are the auditor of RIM Private Ltd. The inventory as at the end of the year was

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` 2.25 crores. Due to unavoidable circumstances, you could not be present at the time of annual Attendance at physical inventory counting, unless impracticable, to:
physical verification. Under the above circumstances how would you ensure that the physical (i) Evaluate management’s instructions and procedures for recording and controlling the results of
verification conducted by the management was in order?(RTP May’20, Old SM) the entity’s physical inventory counting;
Answer 3 (ii) Observe the performance of management’s count procedures;
As per SA 501 “Audit Evidence – Additional Considerations for Specific Items”, the auditor (iii) Inspect the inventory; and
should perform audit procedures, designed to obtain sufficient appropriate audit evidence during his
attendance at physical inventory counting. SA 501 is additional guidance to that contained in SA 500, (iv) Perform test counts; and
“Audit Evidence”, with respect to certain specific financial statement amounts and other disclosures. Performing audit procedures over the entity’s final inventory records to determine whether they
If the auditor is unable to be present at the physical inventory count on the date planned due to accurately reflect actual inventory count results.
unforeseen circumstances, the auditor should take or observe some physical counts on an alternative (II) Attendance at Physical Inventory Counting Not Practicable: In some cases, attendance at
date and where necessary, perform alternative audit procedures to assess whether the changes in physical inventory counting may be impracticable. This may be due to factors such as the nature
inventory between the date of physical count and the period end date are correctly recorded. The and location of the inventory, for example, where inventory is held in a location that may pose
auditor would also verify the procedure adopted, treatment given for the discrepancies noticed during threats to the safety of the auditor. The matter of general inconvenience to the auditor, however,
the physical count. The auditor would also ensure that appropriate cut off procedures were followed is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as
by the management. He should also get management’s written representation on (a) the completeness explained in SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit
of information provided regarding the inventory, and (b) assurance with regard to adherence to laid in Accordance with Standards on Auditing”, the matter of difficulty, time, or cost involved is not
down procedures for physical inventory count. in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or
By following the above procedure, it will be ensured that the physical verification conducted by the to be satisfied with audit evidence that is less than persuasive.
management was in order. Further, where attendance is impracticable, alternative audit procedures, for example, inspection of
documentation of the subsequent sale of specific inventory items acquired or purchased prior to the
physical inventory counting, may provide sufficient appropriate audit evidence about the existence
Question 4 and condition of inventory.
(Includes concepts of SA 705- Modification of Opinion) In some cases, though, it may not be possible to obtain sufficient appropriate audit evidence regarding
Coccyx Ltd. supplies navy uniforms across the country. The Company has 3 warehouses at the existence and condition of inventory by performing alternative audit procedures. In such cases,
different locations throughout the India and 5 warehouses at the borders. The major stocks SA 705 on Modifications to the Opinion in the Independent Auditor’s Report, requires the auditor to
are generally supplied from the borders. Coccyx Ltd. appointed M/s OPAQE & Co. to conduct modify the opinion in the auditor’s report as a result of the scope limitation.
its audit for the financial year 2020-21. Mr. P, partner of M/s OPAQE & Co., attended all the
physical inventory counting conducted throughout the India but could not attend the same at
borders due to some unavoidable reason. Question 5
You are required to advise M/s OPAQE & Co., Moon Ltd. is a dealer in electronic appliances. The Company has a centralized ware house at
the outskirts of Mumbai. The Auditors of the company M/s J K Associates normally attend
(I) How sufficient appropriate audit evidence regarding the existence and condition of inventory may the physical verification of stocks carried out by the Management at the end of the financial
be obtained? year. However, on account of certain disturbances in the region, the physical inventory counting
(II) How is an auditor supposed to deal when attendance at physical inventory counting is impracticable? could not be carried out at the year end. The stock taking is decided to be done by management
(RTP May 21 & May 18, New SM) at some other date subsequently, after a month. In the light of the above facts:
Answer 4 Enumerate the audit procedures to be considered by M/s J K Associates, if physical inventory
(I) Special Consideration with Regard to Inventory: As per SA 501 “Audit Evidence- Specific counting is conducted at a date other than the date of the financial statements with reference to
Considerations for Selected Items”, when inventory is material to the financial statements, the auditor the relevant Standard on Auditing. (PYP 5 Marks, Nov-20)
shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
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Answer 5 accordance with the applicable financial reporting framework. Guide GHK Associates with
As per SA 501 “Audit Evidence- Specific Considerations for Selected Items”, when inventory is ‘Examples of Matters’ that may be relevant when obtaining an understanding of the methods
material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence used by the management with reference to the relevant Standards on Auditing. (PYP 5 Marks,
regarding the existence and condition of inventory. Jan ’21, New SM)
• For practical reasons, the physical inventory counting may be conducted at a date, or dates, other Answer 6
than the date of the financial statements. This may be done irrespective of whether management The auditors, GHK Associates wanted to ensure and obtain sufficient appropriate audit evidence
determines inventory quantities by an annual physical inventory counting or maintains a perpetual regarding the presentation and disclosure of segment information in accordance with the applicable
inventory system. In either case, the effectiveness of the design, implementation and maintenance of financial reporting framework by obtaining an understanding of the methods used by management in
controls over changes in inventory determines whether the conduct of physical inventory counting determining segment information. SA 501 guides in this regard. As per SA 501- “Audit Evidence—
at a date, or dates, other than the date of the financial statements is appropriate for audit purposes. Specific Considerations for Selected Items”, example of matters that may be relevant when obtaining
• If physical inventory counting is conducted at a date other than the date of the financial statements, an understanding of the methods used by management in determining segment information and
the auditor, J K Associates, shall perform the following procedures: whether such methods are likely to result in disclosure in accordance with the applicable financial
reporting framework include:
(A) Attendance at physical inventory counting, unless impracticable, to:
(i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
(i) Evaluate management’s instructions and procedures for recording and controlling the results of
the entity’s physical inventory counting; (ii) Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
(ii) Observe the performance of management’s count procedures;
(iii) The allocation of assets and costs among segments.
(iii) Inspect the inventory; and
(iv) Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.
(iv) Perform test counts; and
(B) Performing audit procedures over the entity’s final inventory records to determine whether they
accurately reflect actual inventory count results. Question 7
• In addition to above, auditor shall also perform audit procedures to obtain audit evidence about Mr. Shah is reviewing the anti-fraud controls for a construction company. The company has
whether changes in inventory between the count date and the date of the financial statements are witnessed a few frauds in the past mainly in the nature of material stolen from the sites and fake
properly recorded. expense vouchers.
• Relevant matters for consideration when designing audit procedures to obtain audit evidence Mr. Shah is evaluating options for verifying the process in detecting fraud and the corrective
about whether changes in inventory amounts between the count date, or dates, and the final action to be taken in such cases. As an expert, you are required to advise Mr. Shah as how
inventory records are properly recorded include: inventory fraud occurs and the verification procedure to be followed for detecting the same.
(MTP 5 Marks, Oct 19)
1. Whether the perpetual inventory records are properly adjusted.
Answer 7
2. Reliability of the entity’s perpetual inventory records.
Inventory frauds - Inventory frauds are many and varied but here we are concerned with misappropriation
3. Reasons for significant differences between the information obtained during the physical count
of goods and their concealment.
and the perpetual inventory records.
(i) Employees may simply remove goods from the premises.
(ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
Question 6
(iii) Inventory records may be manipulated by employees who have committed theft so that book
GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company
quantities tally with the actual quantities of inventories in hand.
for the year ended 31.03.2020 is concerned with the presentation and disclosure of segment
information included in Company’s Annual Report. GHK Associates want to ensure that methods Verification Procedure for Defalcation of inventory - It may be of trading stock, raw materials,
adopted by management for determining segment information have resulted in disclosure in manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The
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loss may be the result of a theft by an employee once or repeatedly over a long period, when the MULTIPLE CHOICE QUESTIONS (MCQS)
same have not been detected. Such thefts usually are possible through collusion among a number of
persons. Therefore, for their detection, the entire system of receipts, storage and despatch of all goods,
etc. should be reviewed to localise the weakness in the system. Question 1
The determination of factors which have been responsible for the theft and the establishment of guilt CA. Vishudh is auditor of a company having 15 inventory locations in the country. In view
would be difficult in the absence of: of multiple inventory locations and logistics issues involved, he decides not to attend physical
inventory count process of the company. The company management also sends him digital
(a) a system of inventory control, and existence of detailed record of the movement of inventory, or
evidence comprising of videos of inventory counting process at different locations as on reporting
(b) availability of sufficient data from which such a record can be constructed. date with date and time stampings. Besides verifying inventory records, he also performs
The first step in such an investigation is to establish the different items of inventory defalcated and their alternative audit procedures like examining details of subsequent sales of specific inventory
quantities by checking physically the quantities in inventory held and those shown by the Inventory items acquired prior to physical inventory counting. Which of following statements is most
Book. appropriate in this regard?
Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be verified (a) The procedure adopted by auditor is in accordance with Standards on Auditing as the auditor
by reference to entries in the Goods Inward and Outward Registers and the documentary evidence has obtained digital evidence with date and time stampings and also performed alternative audit
as regards purchases and sales. This would reveal the particulars of inventory not received but paid procedures.
for as well as that issued but not charged to customers. Further, entries in respect of returns, both (b) The procedure adopted by auditor is in accordance with Standards on Auditing. However, type
inward and outward, recorded in the financial books should be checked with corresponding entries in of digital evidence obtained, and kind of alternative audit procedures performed do not constitute
the Inventory Book. Also, the totals of the Inventory Book should be checked. Finally, the shortages sufficient appropriate audit evidence.
observed on physical verification of inventory should be reconciled with the discrepancies observed
(c) The procedure adopted by auditor is not in accordance with Standards on Auditing as auditor can
on checking the books in the manner mentioned above. In the case of an industrial concern, issue of
skip attendance at inventory counting only when attending it is unfeasible.
raw materials, stores and tools to the factory and receipts of manufactured goods in the godown also
should be verified with relative source documents. (d) The procedure adopted by auditor is in accordance with Standards on Auditing as auditor can skip
attendance at inventory count due to time, difficulty and logistics issues involved. (RTP Nov ’23)
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part
of production and the consequent shortages in production being adjusted by inflating the wastage in Ans: (c)
production; similar defalcations of inventories and stores are covered up by inflating quantities issued
for production. For detecting such shortages, the investigating accountant should take assistance of
Question 2
an engineer. For that he will be more conversant with factors whic h are responsible for shortage in
production and thus will be able to correctly determine the extent to which the shortage in production You have only eight working hours for raw material inventory verification. Based on your
has been inflated. In this regard, guidance can also be taken from past records showing the extent of observation during these eight hours, you have to form an opinion with respect to the correctness
wastage in production in the past. Similarly, he would be able to better judge whether the material of inventory value calculated by the management. The company uses ERP system for updating
issued for production was excessive and, if so to what extent. and recording raw material inventory. The ERP system of the company has passed all the ITGC
checks and inventory rates are calculated by ERP on moving average price (MAP) basis. The
The per hour capacity of the machine and the time that it took to complete one cycle of production,
company has done ABC analysis of all raw material inventory items and has vast number of
also would show whether the issues have been larger than those required.
items in each category. You will form your opinion based on
(a) Based on ABC analysis, check physical inventory of all “A” class items during allotted time and
matching it with ERP stock.
(b) Understand the process of recording of inventory in ERP to ascertain potential weaknesses and
checking physical inventory of mostly “A” class items, some “B” class items and some “C” class
items.

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(c) Check physical inventory of “A” class items as much as possible along with certain “B” class SA 505 – External Confirmations
items and certain “C” class items on sample basis in value wise descending order, compare the
physical stock with ERP system, and tabulate the result. The exercise should be continued till the
end of allotted eight hours. Question 1
(d) Check physical stock of only those items, which have standard packaging so that verification is Mr. Rishabh, in the course of audit of PQ Limited, wants to perform external confirmation
faster considering the eight hour time limit. (RTP May 19) procedures to obtain audit evidence. Guide Mr. Rishabh, listing out the factors that may
assist him in determining whether external confirmation procedures are to be performed as
Ans: (c)
substantive audit procedures. (MTP 5 Marks Sep ‘23)
Answer 1
Factors that may assist Mr. Rishabh, the auditor in determining whether external confirmation
procedures are to be performed as substantive audit procedures include:
(i) The confirming party’s knowledge of the subject matter – responses may be more reliable if provided
by a person at the confirming party who has the requisite knowledge about the information being
confirmed.
(ii) The ability or willingness of the intended confirming party to respond – for example, the confirming
party:
- May not accept responsibility for responding to a confirmation request;
- May consider responding too costly or time consuming;
- May have concerns about the potential legal liability resulting from responding;
- May account for transactions in different currencies; or
- May operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
(iii) The objectivity of the intended confirming party – if the confirming party is a related party of the
entity, responses to confirmation requests may be less reliable.
Question 2
During the course of audit of Moon Limited the auditor received some of the confirmation of the
balances of trade payables outstanding in the balance sheet through external confirmation by
negative confirmation request. In the list of trade payables, there are number of trade payables
of small balances except one old outstanding of Rs.25 Lacs, of whom, no confirmation on the
credit balance received. Comment with respect to Standard of Auditing. (RTP May 18, Old SM)
Answer 2
External Confirmation: As per SA 505, “External Confirmation”, Negative Confirmation is a request
that the confirming party respond directly to the auditor only if the confirming party disagrees with the
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information provided in the request. Negative confirmations provide less persuasive audit evidence Question 4
than positive confirmations. Never permit Limited refuses to allow you to get direct confirmation of the outstanding balances
The failure to receive a response to a negative confirmation request does not explicitly indicate receipt of trade receivables. You want to ensure on grounds of materiality that at least outstanding above
by the intended confirming party of the confirmation request or verification of the accuracy of the a threshold limit needs to be confirmed and reconciliation is to be carried out before finalizing
information contained in the request. Accordingly, a failure of a confirming party to respond to a negative the audit. If the Company does not relent, how will you respond? (PYP 4 Marks, May 18)
confirmation request provides significantly less persuasive audit evidence than does a response to a Answer 4
positive confirmation request. Confirming parties also may be more likely to respond indicating their
SA 505 “External Confirmations”, establishes standards on the auditor’s use of external confirmation
disagreement with a confirmation request when the information in the request is not in their favor, and
as a means of obtaining audit evidence. If the management refuses to allow the auditor to as end a
less likely to respond otherwise. In the instant case, the auditor sent the negative confirmation requesting
confirmation request, the auditor shall:
the trade payables having outstanding balances in the balance sheet while doing audit of Star Limited.
One of the old outstanding of Rs.25 lacs has not sent the confirmation on the credit balance. In case of non (i) Inquire as to Management’s reasons for the refusal, and seek audit evidence as to their validity
response, the auditor may examine subsequent cash disbursements or correspondence from third parties, and reasonableness,
and other records, such as goods received notes. Further non response for negative confirmation request (ii) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant
does not means that there is some misstatement as negative confirmation request itself is to respond to risks of material misstatement, including the risk of fraud, and on the nature, timing and extent
the auditor only if the confirming party disagrees with the information provided in the request. But, if the of other audit procedures, and
auditor identifies factors that give rise to doubts about the reliability of the response to the confirmation
(iii) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
request, he shall obtain further audit evidence to resolve those doubts.
• If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable or the auditor is unable to obtain relevant and reliable audit evidence from
Question 3 alternative audit procedures, the auditor shall communicate with those incharge of governance
Your firm has been appointed as the statutory auditors of AGM Private Limited for the financial in accordance with SA260 “Communication with Those Charged with Governance” and also
year 2018-19. While verification of company’s trade receivables as on 31 st March 2019, determine its implication for the audit and his opinion in accordance with SA705 “Modifications
accountant of AGM Ltd. has requested you, not to send balance confirmations to a particular to the Opinion in the Independent Auditor’s Report”.
group of trade receivables since the said balances are under dispute and the matter is pending in • A refusal by management to allow the auditor to send a confirmation request is a limitation on
the Court. As a Statutory Auditor, how would you deal in this situation? (RTP May’20, Old SM) the audit evidence the auditor may wish to obtain. The auditor is therefore required to inquire as
Answer 3 to the reasons for the limitation. A common reason advanced is the existence of a legal dispute or
ongoing negotiation with the intended confirming party, the resolution of which may be affected by
SA 505 “External Confirmations”, establishes standards on the auditor’s use of external confirmation
an untimely confirmation request. The auditor is required to seek audit evidence as to the validity
as a means of obtaining audit evidence. If the management refuses to allow the auditor to a send a
and reason ableness of there as on because of the risk that management may be attempting to deny
confirmation request, the auditor shall:
the auditor access to audit evidence that may reveal fraud or error.
(i) Inquire as to Management’s reasons for the refusal, and seek audit evidence as to their validity
and reasonableness,
Question 5
(ii) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant
risks of material misstatement, including the risk of fraud, and on the nature, timing and extent During the audit of Star Ltd. a company engaged in the production of paper, the auditor received
of other audit procedures, and certain confirmation for the balances of trade payables outstanding in the balance sheet through
external confirmation by “Negative Confirmation Request”. In the list of trade payables, there
(iii) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
are number of small balances except one which is an old outstanding of ₹ 20 lakhs for which
If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request no confirmation was received. Comment with respect to Standards of Auditing relating to the
is unreasonable or the auditor is unable to obtain relevant and reliable audit evidence from alternative confirmation process and how to deal the non-receipt of confirmation. (PYP 5 Marks Nov 22,
audit procedures, the auditor shall communicate with those in charge of governance and also determine New SM)
its implication for the audit and his opinion.
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Answer 5 - May operate in an environment where responding to confirmation requests is not a significant
External Confirmation: As per SA 505, “External Confirmation”, negative confirmation is a request aspect of day-to-day operations.
that the confirming party respond directly to the auditor only if the confirming party disagrees with the In such situations, confirming parties may not respond, may respond in a casual manner or may
information provided in the request. Negative confirmations provide less persuasive audit evidence attempt to restrict the reliance placed on the response.
than positive confirmations. The failure to receive a response to a negative confirmation request (iii) The objectivity of the intended confirming party – if the confirming party is a related party of the
does not explicitly indicate receipt by the intended confirming party of the confirmation request or entity, responses to confirmation requests may be less reliable.
verification of the accuracy of the information contained in the request.
Accordingly, a failure of a confirming party to respond to a negative confirmation request provides EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
significantly less persuasive audit evidence than does a response to a positive confirmation request.
Factors in determining whether external confirmation procedures are to be performed as
Confirming parties also may be more likely to respond indicating their disagreement with a confirmation
substantive audit procedures: Majority of the examinees discussed with reference to SA 505,
request when the information in the request is not in their favour, and less likely to respond otherwise.
areas where external confirmation is required, positive and negative external confirmation request
In the instant case, the auditor sent the negative confirmation requesting the trade payables having
and design of the external confirmation request instead of writing correct points like the confirming
outstanding balances in the balance sheet while doing audit of Star Limited. One of the old outstanding
party’s knowledge of the subject matter, ability or willingness to respond and the objectivity of the
of ₹ 20 lakh has not sent the confirmation on the credit balance. In case of non-response, the auditor
intended confirming party.
may examine subsequent cash disbursements or correspondence from third parties, and other records,
such as goods received notes. Further non-response for negative confirmation request does not means
that there is some misstatement as negative confirmation request itself is to respond to the auditor only
if the confirming party disagrees with the information provided in the request.
Question 6
Mr. Agarwal, in the course of audit of PQ Limited, wants to perform external confirmation
procedures to obtain audit evidence. Guide Mr. Agarwal, listing out the factors that may
assist him in determining whether external confirmation procedures are to be performed as
substantive audit procedures. (PYP 5 Marks Dec ‘21)
Answer 6
Factors that may assist Mr. Agarwal, the auditor in determining whether external confirmation
procedures are to be performed as substantive audit procedures include:
(i) The confirming party’s knowledge of the subject matter – responses may be more reliable if
provided by a person at the confirming party who has the requisite knowledge about the information
being confirmed.
(ii) The ability or willingness of the intended confirming party to respond – for example, the confirming
party:
- May not accept responsibility for responding to a confirmation request;
- May consider responding too costly or time consuming;
- May have concerns about the potential legal liability resulting from responding;
- May account for transactions in different currencies; or

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SA 510 – Initial Audit Engagements – Opening Balances (i) A qualified opinion or a disclaimer of opinion, as is appropriate in the circumstances; or
(ii) Unless prohibited by law or regulation, an opinion which is qualified or disclaimed, as appropriate,
regarding the results of operations, and cash flows, where relevant, and unmodified regarding
Question 1
State of Affairs.
(Includes concepts of SA 705- Modification of Opinion in Auditor’s Report)
If the auditor concludes that the opening balances contain a misstatement that materially affects the
In an initial audit engagement, the auditor will have to satisfy about the sufficiency and current period’s financial statements and the effect of the misstatement is not properly accounted for
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements, which or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse
may materially affect the current financial statements. Advise, the auditor about the audit opinion, as appropriate, in accordance with SA 705.
procedures to be followed, when financial statements are audited for the first time.
If, after performing the procedure, as an auditor you are not satisfied about the correctness
Question 2
of ‘Opening Balances’, what approach you will adopt in drafting your audit report? (MTP 6
Marks, Oct ’19 & April 18, Old SM) You have been appointed as the auditor of Good Health Ltd. for 2017-18 which was audited by
CA Trustworthy in 2016-17. As the Auditor of the company state the steps you would take to
Answer 1
ensure that the Closing Balances of 2016-17 have been brought to account in 2017-18 as Opening
Audit Procedure for ensuring correctness of Opening Balances: As per SA 510 “Initial Audit Balances and the Opening Balances do not contain misstatements. (MTP 4 Marks, Aug 18)
Engagements- Opening Balances”, the auditor shall obtain sufficient appropriate audit evidence
Answer 2
about whether the opening balances contain misstatements that materially affect the current period’s
financial statements by - 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
a. Determining whether the prior period’s closing balances have been correctly brought forward to
appropriate audit evidence about whether:
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; (i) Opening balances contain misstatements that materially affect the current period’s financial
statements; and
b. Determining whether the opening balances reflect the application of appropriate accounting
policies; 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
c. By evaluating whether audit procedures performed in the current period provide evidence relevant
and adequately presented and disclosed in accordance with the applicable financial reporting
to the opening balances; or performing specific audit procedures to obtain evidence regarding the
framework.
opening balances.
Being new assignment audit evidence regarding opening balances can be obtained by perusing the
If the auditor obtains audit evidence that the opening balances contain misstatements that could
copies of the audited financial statements.
materially affect the current period’s financial statements, the auditor shall perform such additional
audit procedures as are appropriate in the circumstances to determine the effect on the current period’s For current assets and liabilities some audit evidence can ordinarily be obtained as part of audit
financial statements. If the auditor concludes that such misstatements exist in the current period’s procedures during the current period. For example, the collection/payment of opening balances of
financial statements, the auditor shall communicate the misstatements with the appropriate level of receivables and payables will provide audit evidence as to their existence, rights and obligations,
management and those charged with governance. completeness, and valuation at the beginning of the period.
Approach for drafting Audit Report: SA 705 establishes requirements and provides guidance on In respect of other assets and liabilities such as fixed assets, investments long term debt, the auditor
circumstances that may result in a modification to the auditor’s opinion on the financial statements, will examine the records relating to opening balances. The auditor may also be able to get confirmation
the type of opinion appropriate in the circumstances, and the content of the auditor’s report when from third parties (e.g., balances of long term loan obtained from banks).
the auditor’s opinion is modified. The inability of the auditor to obtain sufficient appropriate audi t
evidence regarding opening balances may result in one of the following modifications to the opinion
in the auditor’s report:

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Question 3 In the given case, the management of Captura (P) Ltd. has restrained CA. Mack, its auditor, from
(Includes concepts of SA 580- Written Representations) obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is from the
preceding year. CA. Mack, on believing that the preceding year balances have already been audited
CA. Mack, a recently qualified practicing Chartered Accountant got his first audit assignment
and on the statement of the management that there are no receipts and credits during the current year,
of Captura (P) Ltd. for the financial year 2017-18. He obtained all the relevant appropriate
therefore excluded the verification of Accounts Receivable from his audit programme.
audit evidence for the items related to Statement of Profit and Loss. However, while auditing
the Balance Sheet items, CA. Thus, CA. Mack should have requested the management to provide written representation for their
views and expressions; and he should also not exclude the audit procedure of closing balances of
Mack left out obtaining appropriate audit evidence, say, confirmations, from the outstanding
Accounts Receivable from his audit programme.
Accounts Receivable amounting Rs. 145 lakhs, continued as it is from the last year, on the
affirmation of the management that there is no receipts and further credits during the year. CA.
Mack, therefore, excluded from the audit programme, the audit of accounts receivable on the Question 4
understanding that it pertains to the preceding year which was already audited by predecessor
CA. Ashutosh has been appointed as an auditor of Awesome Health Ltd. for the financial year
auditor. Comment.(MTP 5 Marks, Oct 18 & May 20)
2017-18 which was audited by CA. Amrawati in 2016-17. As the Auditor of Awesome Health
Answer 3 Ltd., state the steps that CA. Ashutosh would take to ensure that the Closing Balances of the
Verification of Accounts Receivable: As per SA 510 “Initial Audit Engagements – Opening financial year 2016-17 have been brought to account in 2017-18 as Opening Balances and the
Balances”, while conducting an initial audit engagement, the objective of the auditor with respect to Opening Balances do not contain any misstatements. (RTP Nov 18)
opening balances is to obtain sufficient appropriate audit evidence about whether- Answer 4
(i) Opening balances contain misstatements that materially affect the current period’s financial Obtaining sufficient appropriate audit evidence while conducting Initial Audit Engagement:
statements; and According to SA 510 on “Initial Audit Engagements- Opening Balances”, the objective of the Auditor
(ii) Appropriate accounting policies reflected in the opening balances have been consistently applied while conducting an initial audit engagement with respect to opening balances is to obtain sufficient
in the current period’s financial statements, or changes thereto are properly accounted for and appropriate audit evidence so that the-
adequately presented and disclosed in accordance with the applicable financial reporting framework. (i) opening balances of the preceding period have been correctly brought forward to the current
When the financial statements for the preceding period were audited by another auditor, the current period;
auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by (ii) opening balances do not contain any misstatement that materially affect the current period’s
perusing the copies of the audited financial statements. financial statements; and
Ordinarily, the current auditor can place reliance on the closing balances contained in the financial (iii) appropriate accounting policies reflected in the opening balances have been consistently applied
statements for the preceding period, except when during the performance of audit procedures for the in the current period’s financial statements, or changes thereto are properly accounted for and
current period the possibility of misstatements in opening balances is indicated. adequately presented and disclosed in accordance with the applicable financial reporting framework.
For current assets and liabilities, some audit evidence about opening balances may be obtained as part Being a new assignment, audit evidence regarding opening balances can be obtained by perusing the
of the current period’s audit procedures, say, the collection of opening accounts receivable during the copies of the audited financial statements.
current period will provide some audit evidence of their existence, rights and obligations, completeness
For current assets and liabilities, some audit evidence about opening balances may be obtained as part
and valuation at the beginning of the period.
of the current period’s audit procedures. For example, the collection/ payment of opening accounts
In addition, according to SA 580 “Written Representations”, the auditor may consider it necessary receivable/accounts payable during the current period will provide some audit evidence of their
to request management to provide written representations about specific assertions in the financial existence, rights and obligations, completeness and valuation at the beginning of the period.
statements; in particular, to support an understanding that the auditor has obtained from other audit
In respect of other assets and liabilities such as property plant and equipment, investments, long term
evidence of management’s judgment or intent in relation to, or the completeness of, a specific assertion.
debts, the auditor will examine the records relating to opening balances. The auditor may also be able
Although such written representations provide necessary audit evidence, they do not provide sufficient to get the confirmation from third parties (e.g., balances of long term loan obtained from banks can be
appropriate audit evidence on their own for that assertion. confirmed from the Bank Loan statement).

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(I) In an initial audit engagement, the auditor will have to satisfy about the sufficiency and Mr. X has been appointed as an auditor of M/s ABC Ltd., Mr. X wants to be satisfied about
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements, the sufficiency and appropriateness of ‘Opening Balances’ to ensure that they are free from
which may materially affect the current financial statements. Lay down the audit procedure, misstatements. Lay down the audit procedure, Mr. X should follow, in the initial audit engagement
you will follow in cases of M/s ABC Ltd. Also suggest the approach to be followed regarding mention in the audit report
(i) when the financial statements are audited for the preceding period by another auditor; and if Mr. X is not satisfied about the correctness of ‘Opening Balances’? (PYP 4 Marks, Nov ‘19)
(ii) when financial statements are audited for the first time. Answer 6
(II) If, after performing the procedure, you are not satisfied about the correctness of ‘Opening Audit Procedures to be followed in case of initial audit engagement: As per SA 510, the auditor
Balances’; what approach you will adopt in drafting your audit report in two situations shall obtain sufficient appropriate audit evidence about whether the opening balances contain
mentioned in (I) above? (RTP May 21) misstatements that materially affect the current period’s financial statements by:
Answer 5 (i) 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
(i) Financial Statements Audited by another Auditor – Audit Procedure: If the prior period’s
items in the current year’s Statement of Profit and Loss;
financial statements were audited by a predecessor auditor, the auditor may be able to obtain
sufficient appropriate audit evidence regarding the opening balances by perusing the copies of (ii) Determining whether the opening balances reflect the application of appropriate accounting
the audited financial statements including the other relevant documents relating to the prior policies; and
period financial statements such as supporting schedules to the audited financial statements. (iii) Performing one or more of the following:
Ordinarily, the current auditor can place reliance on the closing balances contained in the financial (1) Where the prior year financial statements were audited, perusing the copies of the audited
statements for the preceding period, except when during the performance of audit procedures for financial statements including the other relevant documents relating to the prior period financial
the current period the possibility of misstatements in opening balances is indicated. statements;
(ii) Audit of Financial Statements for the First Time – Audit Procedure: When the audit of (2) Evaluating whether audit procedures performed in the current period provide evidence relevant
financial statements is being conducted for the first time, the auditor has to perform auditing to the opening balances; or
procedures to obtain sufficient appropriate audit evidence. Since opening balances represent
(iv) Performing specific audit procedures to obtain evidence regarding the opening balances.
effect of transaction and events of the preceding period and accounting policies applied in the
preceding period, the auditor need to obtain evidence having regard to nature of opening balances, Approach to be followed regarding mention in the Audit Report: If the auditor is unable to obtain
materiality of the opening balances and accounting policies. Since it will not be possible for sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified
auditor to perform certain procedures, e.g., observing physical verification of inventories, etc. opinion or a disclaimer of opinion, as appropriate. Further, If the auditor concludes that the opening
the auditor may obtain confirmation, etc. and perform suitable procedures in respect of fixed balances contain a misstatement that materially affects the current period’s financial statements, and
assets, investments, etc. The auditor can also obtain management representation with regards to the effect of the misstatement is not properly accounted for or not adequately presented or disclosed,
the opening balances. the auditor shall express a qualified opinion or an adverse opinion.
(ii) Drafting Audit Report: 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 EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
opinion, as appropriate. Further, If the auditor concludes that the opening balances contain a Audit Procedures to be followed in case of Initial Audit Engagement - SA-510: Majority of
misstatement that materially affects the current period’s financial statements, and the effect of the the Examinees could not answer to the point and gave irrelevant answers besides many Examinees
misstatement is not properly accounted for or not adequately presented or disclosed, the auditor omitted the approach to be followed regarding mention in the Audit report.
shall express a qualified opinion or an adverse opinion.

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MULTIPLE CHOICE QUESTIONS (MCQS) SA 530 – Audit Sampling

Question 1
SKJ Private Ltd is engaged in the business of construction. The company has also got some Question 1
real estate projects few years back on which it started the work in the last 2 years. The annual
Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial year 2021 -
turnover of the company is INR 600 crores and profits of INR 40 crores.
2022.
The statutory auditors of the company got rotated by another audit firm due to mandatory
Chintan & Mani seem to have different opinions on Audit approach to be adopted for audit of
audit rotation requirements as per the Companies Act 2013.
Chintamani Ltd. Mani is of the opinion that 100% checking is not required and they can rely on
The new statutory auditors of the company started audit of the financial statements for the year Audit Sampling techniques in order to provide them a reasonable basis on which they can draw
ended 31 March 2019 in May 2019. The audit team also requested the client to provide certain conclusions about the entire population.
information on the opening balances to perform their audit procedures. Initially the management
Chintan is concerned that whether the use of audit sampling has provided a reasonable basis for
did not provide any information to the auditors on the opening balances thinking that this is
conclusions about the population that has been tested.
not within the scope of their work, however, after going through the auditing standards, the
management agreed and provided the required information. You are required to guide Chintan about his role if audit sampling has not provided a reasonable
basis for conclusions about the population that has been tested in accordance with SA 530,
Later on, the audit team also started requesting information for the period from 1 April 2019 to
.(RTP Nov’22, New SM)
31 May 2019. With this requirement, CFO of the company got very upset and angry and set up
a meeting with the senior members of the audit team. CFO raised a concern that the audit team Answer 1
has not been doing the work properly and has been asking for unnecessary information like As per SA 530, “Audit Sampling”, the auditor shall evaluate:
information on opening balances and then the information for the period after 31 March 2019. (a) The results of the sample; and
The audit partner explained to the CFO that everything requested by the audit team has been
as per the auditing standards, however, CFO said that in the earlier years, the previous auditors (b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the
never asked for such information. population that has been tested.
You are requested to give your view in respect of this matter. If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions
about the population that has been tested, the auditor may:
(a) The requirement of the auditors for opening balances was valid but for the period after 31 March
2019 is completely wrong as that is out of their scope for the current year’s audit. They can ask for (I) Request management to investigate misstatements that have been identified and the potential for
those details during the audit of next year. further misstatements and to make any necessary adjustments; or
(b) The concern of the CFO was valid. He has seen the previous auditors not performing such audit (II) Tailor the nature, timing and extent of those further audit procedures to best achieve the required
procedures and hence the new audit team should also follow the same approach which was followed assurance. For example, in the case of tests of controls, the auditor might extend the sample size,
by previous auditors as that would lead to efficient in audit. test an alternative control or modify related substantive procedures.
(c) The requirement of the auditors for opening balances as well as for the period after 31 March 2019
is valid. After the requirements of SA 510 and SA 560, audit team is required to perform these Question 2
procedures.
While conducting audit of PC Ltd., CA. T decided to use sampling technique to test the trade
(d) The audit team should set up a meeting with previous auditors wherein it should be assessed why receivables at the planning stage. He directed his team members to divide the whole population
different approach was followed by the previous auditors. On the basis of that discussion with the of trade receivables balances to be tested in a few separate groups called ‘strata’. He directed to
previous auditors, next course of action should be decided. (MTP 1 Marks, May 20) treat each stratum as if it was a separate population and divided the trade receivables balances
Ans: (c) of PC Ltd. for the Financial Year 2022 -23 into groups on the basis of personal judgment as
follows:

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SI. No. Particulars
1. (a) Balances in excess of ` 50,00,000; Question 1
2. While auditing Veer Ltd., CA. Vardhman divided the whole population of trade receivables balances
(b) Balances in the range of ` 40,00,001 to ` 50,00,000;
to be tested in a few separate groups called ‘strata’ and started taking a sample from each of them.
3. (c) Balances in the range of ` 30,00,001 to ` 40,00,000;
He treated each stratum as if it was a separate population. He divided the trade receivables balances
4. (d) Balances in the range of ` 20,00,001 to ` 30,00,000; of Veer Ltd. for the Financial Year 2020-21 into groups on the basis of personal judgment as follows:
5. (e) Balances in the range of ` 10,00,001 to ` 20,00,000;
SI. No. Particulars
6. (f) Balances ` 10,00,000 and below 1. Balances in excess of ` 10,00,000;
From the above mentioned groups, CA. T directed to pick up different percentage of items for
2. Balances in the range of ` 7,75,001 to ` 10,00,000;
examination from each of the group. One of the team members, Mr. Neel, wants to use some other
technique of sampling for the above purpose as the conceptof stratification is not clear to him. You 3. Balances in the range of ` 5,50,001 to ` 7,75,000;
are required to explain the concept of stratification and its uses to Mr. Neel.(PYP 5 Marks May ‘23) 4. Balances in the range of ` 2,25,001 to ` 5,50,000;
Answer 2 5. Balances ` 2,25,000 and below
Concept of Stratification: Stratification is the process of dividing a population into sub- populations, From the abovementioned groups, CA. Vardhman picked up different percentage of items for
each of which is a group of sampling units which have similar characteristics (often monetary value). examination from each of the groups, for example, from the top group i.e. balances in excess of
Uses of Stratification `10,00,000, he selected all the items to be examined; from the second group, he opted for 25 % of the
items to be examined; from the lowest group, he selected 2% of the items for examination; and so
1. Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete on from rest of the groups. Which one of the following methods of sample selection is he following?
sub-populations which have an identifying characteristic. The objective of stratification is to
reduce the variability of items within each stratum and therefore allow sample size to be reduced (a) Systematic sampling.
without increasing sampling risk. (b) Stratified sampling.
2. When performing tests of details, the population is often stratified by monetary value. This allows (c) Section sampling.
greater audit effort to be directed to the larger value items, as these items may contain the greatest (d) Selection sampling. (MTP 1 Mark Oct 21)
potential misstatement in terms of overstatement. Similarly, a population may be stratified
Ans: (b)
according to a particular characteristic that indicates a higher risk of misstatement, for example,
when testing the allowance for doubtful accounts in the valuation of accounts receivable, balances
may be stratified by age. Question 2
3. The results of audit procedures applied to a sample of items within a stratum can only be projected Approach to sampling has the following characteristics:
to the items that make up that stratum. To draw a conclusion on the entire population, the auditor
will need to consider the risk of material misstatement in relation to whatever other strata make I. Random selection of the sample items; and
up the entire population. For example, 20% of the items in a population may make up 90% of II. The use of probability theory to evaluate sample results, including measurement of sampling
the value of an account balance. The auditor may decide to examine a sample of these items. risk.
The auditor evaluates the results of this sample and reaches a conclusion on the 90% of value (a) Statistical sampling
separately from the remaining 10% (on which a further sample or other means of gathering audit
(b) Non-statistical sampling
evidence will be used, or which may be considered immaterial).
(c) Stratified sampling
4. If a class of transactions or account balance has been divided into strata, the misstatement is projected
for each stratum separately. Projected misstatements for each stratum are then combined when (d) Haphazard sampling (MTP 1 Mark March 22)
considering the possible effect of misstatements on the total class of transactions or account balance. Ans: (a)
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Question 3 SA 550 – Related Parties

You are an audit senior of Pendse Accountants and are currently conducting the audit of Stalwart Question 1
Co for the year ended 31 March 2018. Below is an extract from the list of supplier statements as
A firm of a father and a son is receiving Rs. 2 lakhs towards job work done for XYZ Ltd. during
at 31 March 2018 held by the company and corresponding payables ledger balances at the same
the year ended on 31.03.16. The total job work charges paid by XYZ Ltd. during the year are
date along with some commentary on the noted differences:
over Rs. 50 lakhs.
Supplier Statement Balance RS. Payables ledger balance Rs.
The father is Managing Director of XYZ Ltd. having substantial holding. The Managing Director
AB Co 90,000 70,000
told the auditor that since he is not involved in the activities of the firm and since the amount
CD Co 1,85,000 1,15,000 paid to it is insignificant; there is no need to disclose the transaction. He further contended that
AB Co: The difference in the balance is due to an invoice which is under dispute due to faulty such a payment made in the last year was not disclosed. Advise whether Managing Director is
goods which were returned on 29 March 2018. right in his approach. (MTP 5 Marks, Aug ‘18)
CD Co: The difference in the balance is due to the supplier statement showing an invoice dated 27 Answer 1
March 2018 for Rs. 70,000 which was not recorded in the financial statements until after the year end.
Related Party Disclosures: As per definition given in the AS 18 “Related Party Disclosures” parties
The payables clerk has advised the audit team that the invoice was not received until 3 April 2018. are considered to be related if at any time during the reporting period one party has the ability to
The audit manager has asked you to review the full list of trade payables and select balances on control the other party or exercise significant influence over the other party in making financial and/
which supplier statement reconciliations will be performed. Which of the following statement is or operating decisions. Related party transaction means a transfer of resources or obligations between
correct in respect of including or excluding from your sample? related parties, regardless of whether or not a price is charged.
(a) Exclude with material balances at the year-end. In the instant case, the managing director of XYZ Ltd. is a partner in the firm with his son which has
(b) Exclude suppliers which have a high volume of business with Stalwart Co been paid Rs. 2 lakhs as job work charges. The managing director is having a substantial holding in XYZ
(c) Include major suppliers with nil balances at the year-end. Ltd. The case is squarely covered by AS 18. According to AS-18, in the case of related party transactions,
the reporting enterprise should disclose the following:
(d) Include suppliers where the statement agrees to the ledger (MTP 2 Marks, Mar 19)
(i) the name of the transacting related party;
Ans: (c)
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
Question 4
(iv) volume of the transactions either as an amount or as an appropriate proportion;
CA P, as part of a statutory audit exercise, is testing a company’s internal controls over purchase
orders it places for acquiring capital assets. The company places huge orders for the acquisition (v) any other elements of the related party transactions necessary for an understanding of the financial
of capital assets every year, keeping in view the nature of its business and corresponding statements;
requirements. (vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at the
While testing controls in a sample of purchase orders for the acquisition of capital assets, he balance sheet date and provisions for doubtful debts due from such parties at that date; and
failed to notice a lack of adherence to certain established parameters for placing such orders. (vii) amounts written off or written back in the period in respect of debts due from or to related parties.”
The above situation is indicative of _______ Further, SA 550 on “Related Parties”, also prescribes the auditor’s responsibilities and audit procedures
(a) Sampling risk. regarding related party transactions.
(b) Non-sampling risk. The approach of the managing director is not tenable under the law and accordingly all disclosure
(c) Control risk. requirements have to be complied with in accordance with the AS 18. Auditor should insist to make
proper disclosure as per the AS and if management refuses, the auditor shall have to modify his report.
(d) Inherent risk. (MTP 1 Mark Oct ’23)
Also it has to be seen whether section 184 of the Companies Act, 2013 regarding disclosure of interest
Ans: (b) by director has been complied with. If it is not complied with, the auditor needs to modify the report.
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Question 2 (i) SA 550 requires that to identify names of all known related parties, the auditor may inspect
JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your guidance for reviewing the records or documents that may provide information about related party relations hips and
records and documentation of the company regarding ‘related party transactions in the normal transactions, for example entity income tax returns, information supplied by the entity to regulatory
course of business’. authorities, shareholder registers to identify the entity’s principal shareholders, statements of
conflicts of interest from management and those charged with governance, records of the entity’s
Describe the steps to be followed. (MTP 4 Marks, Mar 19)
investments and those of its pension plans, contracts and agreements with key management or
Answer 2 those charged with governance, significant contracts and agreements not in the entity’s ordinary
Review of Records and Documentation Regarding Related Party Transaction: According to SA course of business, specific invoices and correspondence from the entity’s professional advisors,
550 “Related Parties”, during the audit, the auditor shall remain alert, when inspecting records or life insurance policies acquired by the entity, significant contracts re-negotiated by the entity
documents, for arrangements or other information that may indicate the existence of related party during the period, internal auditors’ reports, documents associated with the entity’s filings with a
relationships or transactions that management has not previously identified or disclosed to the auditor. securities regulator (e.g., prospectuses).
In particular, the auditor shall inspect the following for indications of the existence of related party (ii) Some arrangements that may indicate the existence of previously unidentified or undisclosed
relationships or transactions that management has not previously identified or disclosed to the auditor: related party relationships or transactions as an arrangement involves a formal or informal
agreement between the entity and one or more other parties for such purposes as the establishment
(a) Bank, legal and third party confirmations obtained as part of the auditor’s procedures;
of a business relationship through appropriate vehicles or structures, the conduct of certain types
(b) Minutes of meetings of shareholders and of those charged with governance; and of transactions under specific terms and conditions or the provision of designated services or
(c) Such other records or documents as the auditor considers necessary in the circumstances of the financial support.
entity. Examples of arrangements that may indicate the existence of related party relationships or
The auditor may inspect records or documents that may provide information about related party transactions that management has not previously identified or disclosed to the auditor include
relationships and transactions, for example entity income tax returns, information supplied by the entity participation in unincorporated partnerships with other parties, agreements for the provision of
to regulatory authorities, shareholder registers to identify the entity’s principal shareholders, statements services to certain parties under terms and conditions that are outside the entity’s normal course
of conflicts of interest from management and those charged with governance, records of the entity’s of business, guarantees and guarantor relationships etc.
investments and those of its pension plans, contracts and agreements with key management or those (iii) Obtaining further information on significant transactions outside the entity’s normal course
charged with governance, significant contracts and agreements not in the entity’s ordinary course of of business enables the auditor to evaluate whether fraud risk factors, if any, are present and,
business, specific invoices and correspondence from the entity’s professional advisors, life insurance where the applicable financial reporting framework establishes related party requirements,
policies acquired by the entity, significant contracts re - negotiated by the entity during the period, to identify the risks of material misstatement. In addition, the auditor needs to be alert for
internal auditors’ reports, documents associated with the entity’s filings with a securities regulator etc. transactions which appear unusual in the circumstances and which may indicate the existence
of previously unidentified related parties. Examples of transactions outside the entity’s normal
course of business may include complex equity transactions, such as corporate restructurings
Question 3
or acquisitions, transactions with offshore entities in jurisdictions with weak corporate laws,
In the course of audit of QRT Ltd, its statutory auditor wants to be sure of the adequacy of the leasing of premises or the rendering of management services by the entity to another party
related party disclosures? Kindly guide the auditor in identifying the possible source of related if no consideration is exchanged, sales transactions with unusually large discounts or returns,
party information. (MTP 4 Marks, Oct 18) transactions with circular arrangements, for example, sales with a commitment to repurchase,
Answer 3 transactions under contracts whose terms are changed before expiry etc.
Identification of possible sources for Related Parties’ information: As per SA 550 on, “Related (iv) Finally, the auditor should also obtain a written representation from the management concerning
Parties”, the auditor should review information provided by the management of the entity identifying the completeness of information provided regarding the identification of related parties.
the names of all known related parties. However, it is the management, which is primarily responsible
for identification of related parties. The duties of an auditor with regard to reporting of related party
transaction as required by Accounting Standard 18 “Related Party Disclosures” is given in SA 550.

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Question 4 matters specified above (i.e.name of Government, natures of its relationship with reporting entity,
You are the Auditor of Power Supply Corporation Limited, a Government Company for the the nature and amount of transaction etc.). Contention of Management of Corporation regarding
year ended on 31st March 2018. The turnover of the Company for the period was `12,000 crores no requirement of disclosure for transactions between State Controlled Enterprise in not tenable.
from sale of power.
During your audit, you found that the Company had procured Spares for Transmitters for
Related Party Disclosure: Examinees were generally aware about Ind AS 24 and related party
`850 crores from abroad through a Corporation by name Procurement and Supply India
concept but they were lacking in the knowledge of related party of government organisation.
Limited which is also owned and controlled by Government of India. The Financial Statements
of the Power Supply Corporation Limited, prepared incompliance with Ind AS for the year Question 5
ended on 31/03/2018 did not contain any additional disclosure regarding the procurement of
Mr. X, while conducting audit of PQR Ltd, comes across certain transactions which according
spares as referred to above. To your query as to whether any disclosure regarding Related
to him are significant transactions with related parties and identified to be outside the entity’s
Party Transaction would be required, the Management of the Corporation replied that no such
normal course of business. Guide Mr. X with examples of such transactions and to understand
disclosure would be necessary for transactions between State Controlled Enterprises. Analyze
the nature of significant transactions outside the entity’s normal course of business. (PYP 5
this issue in finalizing the Audit Report. (PYP 5 Marks, Nov’18)
Marks, NOV-20)
Answer 4
Answer 5
Related Party Disclosures : As per Ind AS24, “Related Party Disclosures”, a reporting entity is exempt
In the given case of PQR Ltd, Mr. X, while conducting audit has come across certain significant
from the disclosure requirements in relation to related party transactions and outstanding balances,
related party transaction which are identified to be outside the entity’s normal course of business. Mr.
including commitments, with (i) a government that has control or joint control of, or significant
X wants guidance through examples of such significant transactions which are given in SA550
influence over, the reporting entity; and (ii) another entity that is a related party because the same
government has control or joint control of, or significant influence over, both the reporting entity and • As per SA550“ Related Parties”, examples of transactions outside the entity’s normal Course of
the other entity. business may include:
If a reporting entity applies the above exemption, it shall disclose the following about the transactions 1. Complex equity transactions, such as corporate restructurings or acquisitions.
and related outstanding balances refer red to: 2. Transactions with offshore entities in jurisdictions with weak corporate laws.
(1) The name of the government and the nature of its relationship with the reporting entity (i.e. control, 3. The leasing of premises or the rendering of management services by the entity to another party if
joint control or significant influence); no consideration is exchanged.
(2) the following information in sufficient detail to enable users of the entity’s financial statements to 4. Sales transactions with unusually large discounts or returns.
understand the effect of related party transactions on its financial statements:
5. Transactions with circular arrangements, for example, sales with a commitment to repurchase.
(i) the nature and amount of each individually significant transaction; and
6. Transactions under contracts whose terms are changed before expiry.
(ii) for other transactions that are collectively, but not individually, significant, a qualitative or
quantitative indication of their extent.
Question 6
• Further, as per SA550 Related Parties, informing an opinion on the financial statements in
accordance with SA700, the auditor shall evaluate whether the identified related party relationships JKL Limited is engaged in the business of Construction and real estate having various projects
and transactions have been appropriately accounted for and disclosed in accordance with the across states. M/s YT & Co, Chartered Accountants have been appointed as Statutory Auditors.
applicable financial reporting framework. Audit Team from M/s YT & Co for audit of JKL Limited comprises of CA Z-Engagement
Partner, CA Q, a paid assistant and 3 Articled Assistants. During preliminary verification, CA
• In the instant case, Power Supply Corporation Limited, a Government Company has procured
Z observed that huge amount of sub-contract payments were made to M/s JB Associates, a
spares for transmitters for rupees 850 crore from abroad through a corporation namely Procurement
partnership firm in which Director of JKL Limited is a managing partner. The engagement
and Supply India Limited which is also owned and controlled by Government of India. Even after
team discussed that SA 315 and SA 240 shall include specific consideration of the susceptibility
applying the exemption of Ind AS 24, Power Supply Corporation Limited has to disclose the

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of the financial statements to material misstatement due to fraud or error that could result from Question 7
the JKL Limited’s related party relationships and transaction. Highlight the matters that are to (Includes concepts of SA 260- Communication with those charged with governance)
be addressed in the discussion by CA Z with engagement team members with reference to the
Whilst the Audit team has identified few matters, they need your advice to conclude on the
relevant Standard on Auditing. (PYP 5 Marks May ‘22)
same. Engagement Partner have asked them to review the Board minutes and other secretarial/
Answer 6 regulatory records based on which the following additional matters were brought to the attention
As per SA 550 “Related Parties”, the engagement team discussion that SA 315 and SA 240 require shall of the Partner:-
include specific consideration of the susceptibility of the financial statements to material misstatement (i) The long term borrowings from the parent company has no written terms and neither the
due to fraud or error that could result from the entity’s related party relationships and transactions. interest nor the principal has been repaid so far.
Accordingly matters that are to be addressed in the discussion by CA Z among the engagement team (ii) Certain computers were received from the parent company free of cost, the value of which is Rs.
include: 0.23 lac and no accounting or disclosure of the same has been made in the notes to accounts.
1. The nature and extent of the entity’s relationships and transactions with related parties (using, for (iii) An amount of Rs. 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership
example, the auditor’s record of identified related parties updated after each audit). firm, which is a ‘related party’ in accordance with the provisions of the Companies Act,
2. An emphasis on the importance of maintaining professional skepticism throughout the audit 2013 for the marketing services rendered by them. Based on an independent assessment,
regarding the potential for material misstatement associated with related party relationships and the consideration paid is higher than the arm’s length pricing by Rs.0.25 Lakhs per month.
transactions. Whilst the transaction was accounted in the financial statements based on the amounts’ paid,
3. The circumstances or conditions of the entity that may indicate the existence of related party no separate disclosure of this related party transaction has been made in the notes to accounts
relationships or transactions that management has not identified or disclosed to the auditor (e.g., a forming part of the financial statements highlighting the same as a ‘related party’ transaction.
complex organisational structure, use of special - purpose entities for off-balance sheet transactions, Audit Manager has reported that she had asked certain information relating to another ‘related
or an inadequate information system). party’ transaction (amounting to approx. Rs. 47 lac) but the CFO refused to provide the same
4. The records or documents that may indicate the existence of related party relationships or since the same is perceived to be confidential and cannot be shared with the Auditors.
transactions. You are required to advise about items to be reported to those charged with governance, where
5. The importance that management and those charged with governance attach to the identification, applicable, based on your audit findings in the given situation. (MTP 5 Marks, Oct 20)
appropriate accounting for, and disclosure of related party relationships and transactions (if the Answer 7
applicable financial reporting framework establishes related party requirements), and the related As per SA 550, Related Parties, communicating significant matters arising during the audit in
risk of management override of relevant controls. connection with the entity’s related parties helps the auditor to establish a common understanding
6. In addition, the discussion in the context of fraud may include specific consideration of how related with those charged with governance of the nature and resolution of these matters. Examples of
parties may be involved in fraud. For example: significant related party matters include, non-disclosure (whether intentional or not) by management
(a) how special-purpose entities controlled by management might be used to facilitate earnings to the auditor of related parties or significant related party transactions, which may alert those charged
management. with governance to significant related party relationships and transactions of which they may not have
been previously aware; The identification of significant related party transactions that have not been
(b) how transactions between the entity and a known business partner of a key member of
appropriately authorized and approved, which may give rise to suspected fraud; etc.
management could be arranged to facilitate misappropriation of the entity’s assets.
It may be noted that unless all of those charged with governance are involved in managing the entity,
the auditor shall communicate with those charged with governance significant matters arising during
the audit in connection with the entity’s related parties.
The auditor is also required to ensure the compliance of Ind AS 24 / AS 18 Related Party Disclosures.
In view of above in the given scenario, the auditor is required to prepare a brief summary of following
items to be reported to those charged with governance in accordance with SA 260 Communication
with Those Charged with Governance:
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a. One of related party transaction amounting 3.25 lac per month i.e. in lieu of marketing services Question 2
has been noticed of which amount Rs. 0.25 lac per month is exceeds the arm’s length price has As per SA 550 on Related Parties, existence of which relationship indicate the presence of control
not been disclosed highlighting the same as related party transactions as per Ind- AS 24 / AS 18 or significant influence?
Related Party Disclosures.
(a) Friend of a family member of a person who has the authority and responsibility for planning.
b. Refusal by CFO of the company to provide the details of related party transaction amounting to
(b) Holding debentures in the entity.
rupees 47 lac on the ground that same is perceived to be confidential and cannot be shared with
auditors, is not in order, as denying for the related part details of Rs. 47 lac is imposing limitation (c) The entity’s holding of debentures in other entities.
of scope of auditor in view of SA 705. (d) The entity’s holding of equity in other entities. (MTP 1 Mark Oct 21)
c. Receipt of free of cost Computers and long-term borrowing (on no agreed terms and repayment of Ans: (d)
interest and principal) from the Parent Company need separate disclosure in financial statements
as per Ind AS 24 / AS 18 Related Party Disclosures.
Further, in case of all the above cases, the auditor would also need to assess his reporting requirements Question 3
under the clauses (xiii) of Paragraph 3 of CARO 2020 with respect to related party transactions that XYZ & Associate Chartered Accountants were appointed auditors for Weknow LLP. The
whether all transactions with the related parties are in compliance with sections 177 and 188 of engagement manager of the audit team, while designing the auditor response to assessed risk,
Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements concluded that there are no requirements of the applicable financial reporting framework for
etc., as required by the applicable Accounting Standards. disclosing the related party transaction in the Firm’s Financial Statement and hence the audit
team is not required to perform any audit procedures with respect to identification and disclosure
MULTIPLE CHOICE QUESTIONS (MCQS) of related party relationship and transaction in financial statement. You as an engagement
partner guide the engagement manager by selecting the appropriate response from below:
Question 1
(a) Even if the applicable financial reporting framework establishes minimal or no related party
M/s Ram Raj & Associates have been appointed as statutory auditors of Venus Ltd. for the
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party
FY 2019 - 20. During the year, the company has entered into some related party transactions.
relationships and transactions and should sufficiently be able to conclude whether the financial
CA Ram, the engagement partner has taken a management representation letter regarding
statements, insofar as they are affected by those relationships and transactions achieve a true and
the proper accounting, presentation and disclosure of such related party transactions. Is there
fair presentation and are not misleading.
any further responsibility of CA Ram with respect to the other procedures to be performed for
related party transactions? (b) If the applicable financial reporting framework establishes minimal or no related party requirements,
then the auditor is not required to obtain an understanding of the entity’s related party relationships
(a) No, there is no further responsibility of CA Ram as the best audit evidence for the related party
and transactions.
transaction is the management representation letter.
(c) Even if the applicable financial reporting framework establishes minimal or no related party
(b) No, there is no further responsibility of CA Ram as the audit firm is responsible for verifying
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party
the balances and disclosure of related party transactions. The identification of related party
relationships and transactions and should sufficiently be able to conclude whether the financial
transactions is the responsibility of the management of Venus Ltd.
statements, as a whole, are free from all the material related party transactions.
(c) Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and
(d) Because related parties are not independent of each other, hence auditor can obtain the written
respond to the risk of material misstatement arising from the entity’s failure to appropriately account
representation from the Related Party’s auditor regarding the accuracy and completeness of the
for related party relationships, transactions and balances, and obtaining merely management
related party transactions disclosed in Firm’s Financial Statement. This should only be carried
representation letter can be considered to be sufficient appropriate audit evidence.
where the applicable financial reporting framework establishes minimal or no related party
(d) Yes, the auditor has the responsibility to detect fraud and error with respect to the related party requirements. (MTP 1 Mark Nov 21)
transactions. (MTP 1 Marks, Oct 20)
Ans: (a)
Ans: (c)

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Question 1 physical inventory counting, may provide sufficient appropriate audit evidence about the existence
Coccyx Ltd. supplies navy uniforms across the country. The company has 3 warehouses at and condition of inventory.
different locations throughout the India and 5 warehouses at the borders. The major stocks In some cases, though, it may not be possible to obtain sufficient appropriate audit evidence regarding
are generally supplied from the borders. Coccyx Ltd. appointed M/s OPAQE & Co. to conduct the existence and condition of inventory by performing alternative audit procedures. In such cases,
its audit for the financial year 2022-23 Mr. P, partner of M/s OPAQE & Co., attended all the SA 705 on Modifications to the Opinion in the Independent Auditor’s Report, requires the auditor to
physical inventory counting conducted throughout the India but could not attend the same at modify the opinion in the auditor’s report as a result of the scope limitation.
borders due to some unavoidable reason.
You are required to advise M/s OPAQE & Co.,
Question 2
I. How sufficient appropriate audit evidence regarding the existence and condition of inventory
GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company
may be obtained?
for the year ended 31.03.2023 is concerned with the presentation and disclosure of segment
II. How is an auditor supposed to deal when attendance at physical inventory counting is information included in Company’s Annual Report. GHK Associates want to ensure that methods
impracticable? adopted by management for determining segment information have resulted in disclosure in
Answer 1 accordance with the applicable financial reporting framework. Guide GHK Associates with
‘Examples of Matters’ that may be relevant when obtaining an understanding of the methods
(I) Special Consideration with Regard to Inventory: per SA 501 “Audit Evidence- Specific
used by the management with reference to the relevant Standards on Auditing.
Considerations for Selected Items”, when inventory is material to the financial statements, the
auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of Answer 2
inventory by: The auditors, GHK Associates wanted to ensure and obtain sufficient appropriate audit evidence
(1) Attendance at physical inventory counting, unless impracticable, to: regarding the presentation and disclosure of segment information in accordance with the applicable
financial reporting framework by obtaining an understanding of the methods used by management in
determining segment information. SA 501 guides in this regard. As per SA 501- “Audit Evidence—
the entity’s physical inventory counting;
Specific Considerations for Selected Items”, example of matters that may be relevant when obtaining
(ii) Observe the performance of management’s count procedures; an understanding of the methods used by management in determining segment information and
(iii) Inspect the inventory; and whether such methods are likely to result in disclosure in accordance with the applicable financial
reporting framework include:
(iv) Perform test counts; and
(i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
(2) Performing audit procedures over the entity’s final inventory records to determine whether they
accurately reflect actual inventory count results. (ii) Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
Attendance at Physical Inventory Counting Not Practicable: In some cases, attendance at physical
inventory counting may be impracticable. This may be due to factors such as the nature and location (iii) The allocation of assets and costs among segments.
of the inventory, for example, where inventory is held in a location that may pose threats to the safety (iv) Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.
of the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support
a decision by the auditor that attendance is impracticable. Further, as explained in SA 200 “Overall
Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Question 3
Auditing”, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial 2022- 2023.
omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is Chintan & Mani seem to have different opinions on Audit approach to be adopted for audit of
less than persuasive. Chintamani Ltd. Mani is of the opinion that 100% checking is not required and they can rely on
Further, where attendance is impracticable, alternative audit procedures, for example, inspection of Audit Sampling techniques in order to provide them a reasonable basis on which they can draw
documentation of the subsequent sale of specific inventory items acquired or purchased prior to the conclusions about the entire population.

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Chintan is concerned that whether the use of audit sampling has provided a reasonable basis for Confirming parties also may be more likely to respond indicating their disagreement with a confirmation
conclusions about the population that has been tested. request when the information in the request is not in their favor, and less likely to respond otherwise.
You are required to guide Chintan about his role if audit sampling has not provided a reasonable In the instant case, the auditor sent the negative confirmation requesting the trade payables having
basis for conclusions about the population that has been tested in accordance with SA 530. outstanding balances in the balance sheet while doing audit of Star Limited. One of the old outstanding
Answer 3 of ` 20 lakh has not sent the confirmation on the credit balance. In case of non-response, the auditor
may examine subsequent cash disbursements or correspondence from third parties, and other records,
As per SA 530, “Audit Sampling”, the auditor shall evaluate:
such as goods received notes. Further non-response for negative confirmation request does not means
(a) The results of the sample; and that there is some misstatement as negative confirmation request itself is to respond to the auditor only
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the if the confirming party disagrees with the information provided in the request.
population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about Question 5
the population that has been tested, the auditor may:
During the course of the audit of TK Home Private Limited, a recognized export house engaged
(I) Request management to investigate misstatements that have been identified and the potential for in manufacturing of T-shirts under brand name of “TK”. CA Tripti is verifying export revenues
further misstatements and to make any necessary adjustments; or of the company for the year 2022-23. She has verified transactions entered in “Export Sales”
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the required account maintained in accounting software from relevant export invoices. The export sales are
assurance. For example, in the case of tests of controls, the auditor might extend the sample size, being made on payment of IGST, for which a refund is automatically credited in the account of
test an alternative control or modify related substantive procedures. the company after the goods are shipped.
On enquiring from internal audit staff regarding the recognition of export revenues, she is told
that export sales are recognized for the year on the basis of “Bills of Lading”. However, she is
Question 4
not convinced with such a response and feels that the same does not appear to be proper.
During the audit of Star Ltd. a company engaged in the production of paper the auditor received
She finds that three export invoices bearing dates in the month of March 2023 having a value
certain confirmation for the balances of trade payables outstanding in the balance sheet through
of ` 75.00 lacs have not been recognized in export revenue on the ground that bills of lading for
external confirmation by “Negative Confirmation Request”. In the list of trade payables, there
these invoices were issued in the month of April 2023.
are number of small balances except one which is an old outstanding of` 20 lakhs for which no
confirmation was received. Discuss from what sources she can obtain reliable audit evidence in this regard. How can she
challenge management’s assertion regarding the completeness of export revenues for the year
Comment with respect to Standards of Auditing relating to the confirmation process and how
2022-23?
to deal the non receipt of confirmation.
Answer 5
Answer 4
She can obtain reliable audit evidence by going through GST returns filed by the company on GST
External Confirmation: As per SA 505, “External Confirmation”, negative confirmation is a request
portal and correlating the same with e-way bills. She can obtain audit evidence about how company
that the confirming party respond directly to the auditor only if the confirming party disagrees with the
has reflected its export sales in its GST returns and whether export sales pertaining to three invoices
information provided in the request. Negative confirmations provide less persuasive audit evidence
having value of ` 75.00 lacs are reflected in such returns.
than positive confirmations.
Further, e-way bills generated on the portal would provide evidence that goods have moved out of
The failure to receive a response to a negative confirmation request does not explicitly indicate receipt
the company’s premises. The export revenue should have been booked at the time the goods moved
by the intended confirming party of the confirmation request or verification of the accuracy of the
out of the company’s premises. The company is claiming an IGST refund. The refund is linked to the
information contained in the request.
monthly sales return. This aspect can also be verified.
Accordingly, a failure of a confirming party to respond to a negative confirmation request provides
“Bill of Lading” is only a document issued by the carrier to the shipper of goods that goods have
significantly less persuasive audit evidence than does a response to a positive confirmation request.
been taken on board. She should challenge and counter management’s assertion on the above grounds

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and point out violations of relevant accounting standards and principles. In this way, she can obtain She finds it proper to correspond directly with the lawyer. She obtains the address and mail id
reliable audit evidence. of the lawyer from his professional services bill. She shoots off an inquiry letter asking for the
Highlighting such digital and other evidence, she can challenge management’s assertion regarding the nature and status of litigation claims against the company on her letterhead.
completeness of export revenues and point out that export revenues are understated. Is her approach proper? Irrespective of the merits of the approach followed by her, what she is
trying to achieve by corresponding with lawyer of the company?
Answer 7
Question 6
SA 501 states that when audit procedures performed indicate that material litigation or claims may
CA Prabhjot has planned observing the physical count of inventories at the plant of a company
exist, the auditor shall seek direct communication with the entity’s external legal counsel. The auditor
located in remote area in the state of Uttarakhand as part of a statutory audit exercise as at close
shall do so through a letter of inquiry prepared by management and sent by the auditor, requesting the
of year ending 31st March 2023. He has already informed the management of his intention to
entity’s external legal counsel to communicate directly with the auditor.
reach the plant site by evening of 29th March 2023. He plans to inspect inventories, observe the
counting process and perform test counts among other matters. Therefore, her approach in communicating with an external lawyer is wrong. She has to make
management aware of her intention to communicate directly with the lawyer. The letter of enquiry
The management has made all necessary arrangements to facilitate the above exercise. However,
has to be prepared by management and sent by her.
an agitation in Himalayan hills has started on 28th March 2023 for the promulgation of a strict
law relating to the conversion of agricultural land for commercial use. Many civil society groups Her purpose in corresponding with the lawyer of the company is to identify litigation and claims
are participating in the agitation. NH-7 leading to the plant site is blocked by protestors. The involving the entity which may give rise to a risk of material misstatement. It is due to the reason that
plant is not accessible through any other mode. The blockade is lifted after one month when litigation and claims involving the entity may have a material effect on the financial statements and
state government announced the formation of a committee to look into protestors’ demands. thus may be required to be disclosed or accounted for in the financial statements.
Does the above case highlight to a situation of “impracticability of attendance” at inventory
counting in terms of requirements of SA 501? Question 8
How should the auditor proceed in above situation? On going through financial statements and records of “TS Ltd.,” during the course of statutory
Answer 6 audit, CA Tanmaya finds that substantial inventories of the company consisting of mast
lighting poles remain with “Super Industries” for certain finishing works. While planning audit
The above situation does not highlight the impracticability of attendance at inventory counting. It only procedures, he had planned about seeking confirmation from “Super Industries” regarding
shows that the auditor is unable to attend physical inventory counting due to unforeseen circumstances existence and condition of such mast lighting poles belonging to TS Ltd. lying with them as on
arising out of agitation by protestors. It has led to the inaccessibility of the plant site for a month. The 31st March, 2023.
blockade is lifted after a month.
However, the premises of “Super Industries” were raided by DGGI officials (Director General
SA 501 states that if the auditor is unable to attend physical inventory counting due to unforeseen of GST Intelligence) in connection with the busting of a fake billing scam. The proprietor of
circumstances, the auditor shall make or observe some physical counts on an alternative date and the firm was arrested in November 2022 and came out on bail in the month of March 2023.
perform audit procedures on intervening transactions. Therefore, the audit should attend to the physical The details of proprietor and his firm were flashed prominently in local newspapers of the city
inventory count after the blockade is lifted and perform audit procedures on intervening transactions. where company is located. CA.
Tanmaya also belongs to the same place. Discuss how he should proceed in the above matter as
Question 7 auditor of TS Ltd.
On reviewing legal expenses account of Zed Ltd., CA. Sunitha, auditor of company, finds that Answer 8
legal fees amounting to ` 10 lac was paid to B. George, a reputed lawyer, during the year 2022- SA 501 states that when inventory under the custody and control of a third party is material to the
23. On inquiry with management regarding the purpose of such expenditure, evasive reply was financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
received from management stating that a lot of work is performed by the said lawyer on behalf existence and condition of that inventory by performing one or both of the following:
of the company. However, no specific details were provided.

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(a) Request confirmation from the third party as to the quantities and condition of inventory held on indicates that businesses on those addresses were closed. Further, there are no fresh registrations
behalf of the entity. pertaining to the PANs of these parties. However, the auditor sent external confirmation requests in
(b) Perform inspection or other audit procedures appropriate in the circumstances. March 2023, which were duly responded. It raises questions on the reliability of responses received.
It further states that where information is obtained that raises doubt about the integrity and objectivity SA 500 indicates that even when audit evidence is obtained from sources external to the entity,
of the third party, the auditor may consider it appropriate to perform other audit procedures instead of, circumstances may exist that affect its reliability. All responses carry some risk of interception, alteration
or in addition to, confirmation with the third party. or fraud. Such risk exists regardless of whether a response is obtained in paper form or by electronic or
other medium. Factors that may indicate doubts about the reliability of a response include:
Examples of other audit procedures include:
• Was received by the auditor indirectly or
• Attending, or arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable. • Appeared not to come from the originally intended confirming party.
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third party’s Keeping in view the circumstances described in the case situation, there is a risk that the response has
internal control for ensuring that inventory is properly counted and adequately safeguarded. not come from the originally intended confirming party.
• Inspecting documentation regarding inventory held by third parties Unreliable responses may indicate a fraud risk factor that requires evaluation.
• In the given case, the integrity of the third party appears to be doubtful in view of DGGI raids and
his possible involvement in a fake billing scam. He has already been behind bars. Question 10
• Keeping in view above, besides obtaining confirmation from such party, he may attend a third CA M. Hussain is appointed auditor of a firm for year 2022-23 on 31st July, 2022. The accounts of
party’s physical counting or ask some other auditor to attend physical counting as on reporting firm were unaudited in year 2021-22. The firm had material inventories reflected in its financial
date, depending upon practical considerations. He can also inspect the record of goods sent and statements even as on close of 31st March, 2022.
received back from such party by tracing it to challans, e-ways bills etc. and correlate the above
He is performing audit procedures, including attending physical inventory count as on 31st
information.
March, 2023.
However, there is a lingering doubt in his mind regarding opening inventories reflected in
Question 9 financial statements.
As auditor of Groom Limited, you have sent positive confirmation requests to 30 creditors of the Does there exist any responsibility on his part in such a situation?
company in March 2023. All of the creditors in informal sector are small concerns. You choose Answer 10
to send positive confirmation requests to all the above parties at their business addresses stated
SA 510 states that in conducting an initial audit engagement, one of the objectives of the auditor with
on respective bills after discussing the matter with CFO of the company. The CFO is cooperative
respect to opening balances is to obtain sufficient appropriate audit evidence about whether opening
and does not raise any hassles in the matter.
balances contain misstatements that materially affect the current period’s financial statements. The
Responses to confirmation requests are received within a week’s time. Your articled clerk informs auditor has to evaluate whether audit procedures performed in the current period provide evidence
you that out of above 30 creditors, GST registrations of 25 concerns have been cancelled during relevant to the opening balances or specific audit procedures are required to be performed to obtain
financial year 2022-23 itself by collating information from GST portal. He further informs you evidence regarding the opening balances.
that there are no fresh registrations pertaining to PANs of these parties.
In the case of inventories, however, the current period’s audit procedures on the closing inventory
How you would proceed to deal with the situation as auditor of the company? balance provide little audit evidence regarding inventory on hand at the beginning of the period.
Answer 9 Therefore, additional audit procedures may be necessary, and one or more of the following may
SA 505 states that if the auditor determines that a response to a confirmation request is not reliable, the provide sufficient appropriate audit evidence:
auditor shall evaluate the implications on the assessment of the relevant risks of material misstatement, • Observing a current physical inventory count and reconciling it to the opening inventory quantities.
including the risk of fraud, and on the related nature, timing and extent of other audit procedures. • Performing audit procedures on the valuation of the opening inventory items.
In the instant case, GST registrations of 25 concerns have been cancelled in the year 2022-23. It • Performing audit procedures on gross profit and cut-off.
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Question 11 Limited does not manufacture blankets, and the purchase of part of old machinery pertaining to
CA. Ritesh Deshpande has drawn some samples during the course of audit of a manufacturing blanket manufacturing has no rationale for it primarily. A business rationale from the related party’s
company for testing controls as well as for tests of details. On the basis of the samples selected, perspective that appears inconsistent with the nature of its business may represent a fraud risk factor.
he reaches an erroneous conclusion that access controls on applications are less effective.
Further, on the basis of samples selected, he concludes erroneously that work-in progress Integrated Case Scenario
inventories amounting to ` 5 crore in financial statements are materially misstated.
Black & White Ltd. is into the business of manufacturing readymade garments in Amritsar.
Outlining the above risk involved, discuss how it is going to affect his audit of the company. It procures all the raw material required for its production from Punjab, Himachal Pradesh
Answer 11 & J&K. Its sales market, however, covers almost all the northern parts of the country. CA
Anu is the engagement partner of Maheshwari & Co appointed as the statutory auditor of the
The described risk is sampling risk. It is a risk that the auditor’s conclusion based on a sample may be
company. She calls for a meeting of the engagement team to delegate work and responsibilities.
different from the conclusion if the entire population were subjected to the same audit procedure. In
During the audit, the engagement team comes across the following facts: -
the given case, the auditor has arrived at erroneous conclusions on the basis of the samples selected. In
the case of a test of controls, he has concluded that access controls are less effective than they actually Woolen Private Limited is one of the vendors of the company from which the company has been
are. purchasing wool for many years on a current account basis, but no single purchase has been made
in the last nine months, and the outstanding balance stands as it is in the books of accounts. CA
In the case of a test of details, he has concluded erroneously that a material misstatement exists when
Anu wants to confirm the balance and requests the CFO of the company for sending a balance
in fact, it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead
confirmation request to Woolen Private Ltd., to which he refuses and is not willing.
to additional work to establish that initial conclusions were incorrect.
The Fashion Jingo Ltd. is one of the customers of the company and hasn’t replied to CA Anu’s
positive balance confirmation request sent.
Question 12
Mr. X, one of the fashion designers, had sold his designs to the company but owing to a dispute,
“Living Well Private Limited” is engaged in the manufacturing and export of floor coverings. the contract got cancelled, and now both the parties are under litigation in the local court of law.
Such products are labor-intensive and do not require much of capital investment in machinery. The engagement team is guided as to the procedures to be designed and performed to identify
The company has no plans to diversify in other product lines. Its directors are also holding this matter.
significant interest in another company “My Living Private Limited” engaged in manufacturing
CA Anu simultaneously seeks direct communication with the company’s external legal counsel
of blankets using capital intensive machinery.
sensing the risk of material misstatement. However, it ends up in vain as the external legal
During the course of the audit of “My Living Private Limited”, it was noticed by you that the counsel, Mr. Chadha, refuses to comment. She is unable to obtain sufficient appropriate audit
company has sold machinery of ` 1 crore to “Living Well Private Limited” during the year. The evidence in this regard through alternative audit procedures either.
transaction has been done at normal market rates applicable to such used machinery.
The team documents all the relevant information w.r.t. the above facts, and CA Anu issues the
How do you view the above transaction as auditor of “My Living Private Limited”? audit report accordingly.
Answer 12
In respect of significantly related party transactions outside the normal course of business of an entity, 1. Fashion Jingo Ltd. has not responded to CA Anu’s request. What should be proper course of
it is the responsibility of the auditor, in accordance with SA 550, to evaluate the business rationale or action for her in such a situation?
lack thereof of transactions that may have been entered to indulge in fraudulent financial reporting or
(a) Perform alternative audit procedures
conceal misappropriation of assets.
(b) Consider it as a negative confirmation
The auditor has to seek to understand the business rationale of such a transaction from a related
party’s perspective. It would help him understand the economic reality of such a transaction and why (c) Give a Qualified opinion
it was carried out. (d) Should visit the customer company premises herself and confirm the balance on the spot.
In the given situation, there is no primary rationale for such a transaction. Living Well Private Ans: (a)

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2. With respect to advocate Chadha’s cold shoulder to CA Anu’s request, what she should do? Case Study 1
(a) Modify her audit opinion Honest Specialty Chemicals Private Limited is a ` 1,000 crore turnover company having plants
(b) Give an unqualified opinion in Khopoli, Mahad, and Ankles war for manufacturing various products for fertilizer units,
cosmetics and paint industry,etc. The company has built up a good reputation, and apart from
(c) Give a disclaimer of opinion
the domestic market, it exports to the European market and the Middle East. The company is a
(d) Withdraw from this engagement closely held company owned by three friends and their family members. The types of materials
Ans: (a) handled and produced are hazardous.
Following further latest information relating to the company is as under: -
3. What should be CA Anu’s first and foremost response in the case of request made relating to • The company needs to import the key raw materials and is exposed to high risk of price
balance confirmation from Woolen Pvt. Ltd.? fluctuations and currency risks.
(a) Perform alternate audit procedures. • The company carries high inventory due to the long import cycle and seasonal sales pattern.
(b) Withdraw from the engagement. • The working capital is almost 60% blocked in inventory and rest in receivables.
(c) Communicate with Those charged with Governance telling the effects on his audit opinion. • The company has huge investments in plant and machinery financed through term loans
from financial institutions.
(d) Inquire as to the reasons behind the management’s response and seek audit evidence as to its
validity and reasonableness • Since the company has large imports, it buys import licenses from the open market.
Ans: (d) • The company has received customs notices about using fake licenses for importing materials
without paying duty. The company has filed an appeal against the said notice and the same
is pending with the Appellate Tribunal. The amount involved is material and, along with
4. Which of the following procedures will not be performed by the engagement team as audit interest and penalty, could be more than 10% of turnover.
procedures while dealing with the case of Mr. X?
• The company has liquid chemicals stored in huge tanks.
(a) Inquiry of Management.
• The powdered form of chemicals is stored in standard-sized drums
(b) Inquiry of Mr. X
• Few items of stocks like coal, Sulphur are lying in the open area.
(c) Reviewing Minutes of Meetings
• The company has huge domestic sales on a consignment basis, and vast quantities of finished
(d) Reviewing Legal expenses account inventories are lying with the consignees across India.
Ans: (b) • The company has received an order from NGT to pay a fine of INR 1.5 crores for the emission
of toxic chemicals in the air and water. The company has filed an appeal against the said order.
• The type of plant is such that it has to be a continuous process, and at any time, huge quantities
of materials are in process.
• Raw Materials are stored in huge tanks located 2 kilometers from the plant, and to transport
the chemicals (liquid), there is a network of pipes connecting them, and at any point in time,
there are huge quantities of materials lying in the pipeline.
• The company has prepared its inventory details by involving a management expert.
• During the year, the previous auditor resigned, and a new auditor got appointed.
Based on the case study, please advise the auditor on the important aspects of carrying out the
audit procedures to obtain sufficient appropriate audit evidence in respect of the following: -

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Question 1 sulphur. The unit of measurement for each of the above categories may be different and could involve
Which audit procedures are required for verifying existence and condition of company’s technical and mathematical principles involving technical and scientific expertise. Keeping these
inventories with specific reference to its nature operations? matters in view, inventory details have been prepared by involving management’s expert.
Answer 1 When information to be used as audit evidence has been prepared using the work of a management’s
expert, the auditor shall, having regard to the significance of that expert’s work for the auditor’s
The auditor needs to obtain sufficient appropriate audit evidence regarding existence and condition
purposes:
of inventory.
a. Evaluate the competence, capabilities and objectivity of that expert
For the above, the auditor needs to do all the following: -
b. Obtain an understanding of the work of that expert and
(a) Attendance at physical inventory counting to:
c. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
the entity’s physical inventory counting like:
- The existence of appropriate control activities: collection of used physical inventory count records, Question 3
accounting for unused physical inventory count records, count and recount procedures. What additional procedures does the auditor need to carry out in respect of stocks lying with
- The accurate identification of the stage of completion of work-in- progress, of slow moving, consignees all over the country?
obsolete, or damaged items and of inventory lying in tanks, in pipes and in open areas. Answer 3
- The procedures used to estimate physical quantities, for liquid chemicals lying in process, tanks, Apart from obtaining the confirmation from the third party as to the quantities and condition of the
pipelines, in open areas like coal pile, sulphur pile, etc. inventory held on behalf of the entity, the auditor may perform the following other audit procedures:
- Control over the moment of inventory between areas and the shipping and receipt of inventory - Attending, or arranging for another auditor to attend, the third party’s physical counting of
before and after the cutoff date. inventory,
(b) Observe the performance of Management’s count procedure by observing the control over the - Obtaining another auditor’s report or a service auditor’s report on the adequacy of the third party’s
movement of inventory before, during and after the count to determine adequacy and effectiveness internal control for ensuring that inventory is properly counted and adequately safeguarded.
of count procedure.
- Inspecting documentation regarding inventory held by third parties
(c) Inspect the inventory to assist in identifying obsolete, damaged or ageing of inventory.
(d) Perform the test counts to obtain the sufficient appropriate audit evidence
Question 4
(i) By tracing items selected from the physical inventory to management’s count records,
What procedures should the auditor need to undertake for litigation matters?
(ii) By obtaining copies of Management’s completed physical inventory count records
Answer 4
(e) Cross matching the final inventory records with the actual inventory count results.
The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity by: -
Question 2 - Inquiry of management and, where applicable, others within the entity including in- house legal counsel.
The company has prepared inventory details by involving a management’s expert. Elaborating - Reviewing minutes of meetings of those charged with governance and correspondence between
upon its rationale, discuss responsibilities of auditor in regard to information prepared by the entity and its external legal counsel.
company involving such an expert.
- Reviewing legal expense account.
Answer 2
The legal claims involving customs and fine of NGT are material. In such circumstances if auditor
The company deals with specialty chemicals which are in liquid condition, powdered condition, lying assesses risk of material misstatements regarding litigation, he can seek letter of specific inquiry from
in the huge tanks or in plants under process, lying in pipelines or lying in open areas like coal and the external legal counsel including: -

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• A list of litigation and claims 3) External confirmations receivables are not reliable in which of the following situations:
• Where applicable, management’s assessment of the outcome of each of the identified litigation and (a) The response directly received by the auditor
claims and its estimate of the financial implications, including cost involved and (b) The confirmation has come from the address of the confirming party
• A request that the entity’s external legal counsel confirm the reasonableness of management’s (c) The confirmation is signed by the plant manager
assessments and provide the auditor with further information if the list is considered incomplete or
(d) The confirmation is positive confirmation
incorrect.
Ans: (c)
• The auditor may seek meeting with the external legal counsel if the matter is having significant
risk, it is complex or there is disagreement between management assertion and legal counsel’s
views. 4) The new auditor planned certain procedures with respect to opening balances. Which of the
• Obtaining written representation from the management and where appropriate those charged following procedures is not in accordance with SA 510?
with governance that all the known actual or possible litigation and claims whose effects should (a) Reading the most recent financial statements and audit report
be considered when preparing the financial statement have been disclosed to the auditor and
(b) Where the prior period report is modified, the impact on the current period
appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework. (c) Correctly bringing forward of prior period closing balances
(d) Ascertaining whether predecessor auditor had attended physical inventory count
(MCQS) Ans: (d)
1) The objectivity of the management’s expert is likely to be lesser if:

a) The expert is competent Case Study 2
b) The expert is capable “Trustworthy Real Estate Private Limited” Mr. Bharose Lal as MD along with his wife, Maya,
owned the company.
c) The expert has relevant experience
The company had floated one SPV “Real Trust Developers Private Limited” which a foreign
d) The expert is employed by the entity
entity became a Joint Venture partner with a 50% stake.
Ans: (d)
The venture was formed with its Head Office in Mumbai to invest in SRA projects (Slum
rehabilitation authority) and develop them into commercial units for sale.
2) Which of the following matters is irrelevant for auditor in planning attendance at physical Mr. Bharose Lal was going through a rough patch in his life. He was in financial difficulty and
inventory counts? had mounting dues and huge outstanding exposure to banks and suppliers in his companies.
(a) Nature of inventory Mrs. Maya was from a very wealthy family and had fallen in love with Mr. Bharose Lal, who
was from a middle-class family. Mrs. Maya had an expensive lifestyle and was always short of
(b) The timing of physical inventory counting
funds to maintain her lifestyle. Mr. Bharose Lal sensed a golden opportunity in the new venture
(c) The nature of the internal control related to inventory because the foreign partner had no knowledge of Indian regulations and how the SRA projects
(d) Whether 100% of inventory is covered in the count worked and was solely dependent on the local partner to get all the permissions, scouting for
Ans: (d) the projects, getting consents from the slum dwellers for the project, giving contracts for the
construction of projects and such matters.
M/S ABC and Company, Chartered Accountants were appointed as the auditor of the joint
venture, and the engagement team was headed by CA Sceptic, who had, in his stint with the
firm, was instrumental in unearthing two major frauds and had the ability to sniff out any such
scenarios.

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Mr. Bharose Lal has a dominant personality and a powerful influence on functioning, and (a) How special-purpose entities controlled by management might be used to facilitate earnings
everybody looks to him for guidance. The governance structure was very poor in the organization, management
and Mr. Bharose Lal used to dictate the decisions. Even though as part of the Joint Venture, (b) How transaction between the entity and known business partner of a key member of management
there was a detailed governance structure and policies and procedures in place for the decision- could be arranged to facilitate misappropriation of the entity’s assets.
making process at the joint venture. However, the representative on the board of the Joint
Venture of the foreign partner who had shifted to India to supervise the SRA project had grown - An exchange of ideas among engagement team members about how and where they believe
friendly with Mr. Bharose Lal, and Mr. Bharose Lal had even gone out of the way to help him the entity’s financial statements may be susceptible to material misstatement due to fraud, how
get good accommodation and second- hand Mercedes. Often, they both go to a club in the management could perpetrate and conceal fraudulent financial reporting, and how assets of the
evening for a drink. entity could be misappropriated.
The dealings in the SRA project are not very transparent and above board but are very opaque. - A consideration of circumstances that might be indicative of earnings management and the
Given the above situation, CA Sceptic wants to discuss with the audit team areas and situations practices that might be followed by management to manage earnings that could lead to fraudulent
where risk of material misstatement is possible and there are chances of having an undisclosed financial reporting.
related party relationship to misappropriate the funds. - A consideration of the known external and internal factors affecting the entity that may create an
incentive or pressure for management or others to commit fraud, provide the opportunity for fraud
to be perpetrated, and indicate a culture or environment that enables management or others to
Question 1 rationalize committing fraud.
Please guide the engagement team on the further course of action as per SA 550. - A consideration of management’s involvement in overseeing employees with access to cash or
Answer 1 other assets susceptible to misappropriation.
The engagement team shall include specific consideration of the susceptibility of the financial - A consideration of any unusual or unexplained changes in behavior or lifestyle of management or
statements to material misstatement due to fraud or error that could result from the entity’s related party employees which have come to the attention of the engagement team.
relationships and transactions. - The nature and extent of the entity’s relationships and transactions - An emphasis on the importance of maintaining a proper state of mind through out the audit
with related parties as identified independently by the Auditor by verification of MBP-1 data and data regarding the potential for material misstatement due to fraud.
available on MCA website relating to directors and companies, etc.
- A consideration of the types of circumstances that, if encountered, might indicate the possibility
- An emphasis on the importance of maintaining Professional Skepticism throughout the audit of fraud.
regarding the potential for material misstatement associated with related party relationships and
- A consideration of how an element of unpredictability will be incorporated into the nature, timing
transactions.
and extent of the audit procedures to be performed.
- The circumstances or conditions of the entity that may indicate the existence of related party
- A consideration of the audit procedures that might be selected to respond to the susceptibility of
relationships or transactions that management has not identified or disclosed to the auditor (e.g., a
the entity’s financial statement to material misstatement due to fraud and whether certain types of
complex organizational structure, use of special purpose entities off-balance sheet transactions, or
audit procedures are more effective than others.
an inadequate information system).
- A consideration of any allegations of fraud that have come to the auditor’s attention.
- The records or documents that may indicate the existence of related party relationships or
transactions. - A consideration of the risk of management override of controls.
- The importance of management and those charged with governance attached to the identification,
appropriate accounting for, and disclosure of related party relationships and transactions (if the Question 2
applicable financial reporting framework establishes related party requirement), and the related
What are fraud risk factors in given case?
risk of Management override of relevant controls.
Answer 2
- In addition, the discussion in the context of fraud may include specific consideration of how related
parties may be involved in fraud. For example: The fraud risk factors are the events or conditions that indicate an incentive or pressure to commit
fraud or provide an opportunity to commit fraud.
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The fraud risk factors are classified based on the three conditions that are generally present when In such situations, the auditor shall:
fraud exists: - Promptly communicate the relevant information to the other members of the engagement team in
(i) An incentive or pressure to commit fraud order to assist them in determining whether this information affects the results of and conclusions
(ii) A perceived opportunity to commit fraud drawn from risk assessment procedures already performed, including whether the risk of material
misstatement needs to be reassessed.
(iii) An ability to rationalize the fraudulent action.
- Where the applicable financial reporting framework establishes related party requirements:
In the given case scenario following fraud risk factors can be segregated in the 2 conditions of incentive
or pressure to commit fraud in a perceived opportunity to commit fraud. i. Request management to identify all transactions with the newly identified related parties for the
auditor’s further evaluation; and
1) An incentive or pressure to commit fraud:
ii. Inquire as to why the entity’s controls over related party relationships and transactions failed to
- Financial difficulty with huge outstanding dues towards vendors and Financial Institutions.
enable the identification or disclosure of the related party relationships or transactions;
- Expensive lifestyle.
- Perform appropriate substantive audit procedures relating to such newly identified related parties
- Requirement to fund ` 5 crore as equity contribution in the SPV. or significant related party transactions.
2) A perceived opportunity to commit fraud: - Reconsider the risk that other related parties or significant related party transactions may exist that
- Dependency of the foreign partner and no knowledge of the foreign partner of local laws and the management has not previously identified or disclose to the auditor, and perform additional audit
SRA business model in India procedures as necessary; and
- The risk is due to the way the real estate industry functions and particularly risk due to the SRA - If the non-disclosure by management appears intentional (and therefore indicative of a risk of
business model. material misstatement due to fraud), evaluate the implications for the audit. In such cases, the
requirements and guidance in SA-240 regarding the auditor’s responsibilities relating to fraud
- Dominant personality of MD, which can lead to management override of controls for undisclosed
in an audit of financial statements are relevant where management appears to have intentionally
business relationships with M/s. Useless and Sons (P) Ltd.
failed to disclose related parties or significant related party transactions to the auditor. The auditor
may also consider whether it is necessary to re-evaluate the reliability of management’s responses
Question 3 to the auditor’s inquiries and management’s representations to the auditor.
Given the situation that each partner in the joint venture has to bring into the entity a contribution - The Auditor needs to carry out verification and inspection of the ownership structure and the
of 5 crores each and given the situation that Mr. Bharose Lal had appointed one agency, the review of the financial statements of the M/s. Useless and Sons (P) Ltd through the MCA website
name Useless & Sons Private Limited to get consent from the slum dwellers, for which the and establish the nexus between the two.
agency was paid 20 crores as Kitty to get the job done. - The Auditor needs to carry out an inspection of the data filed by Mr. Bharose Lal for his group
CA Sceptic inclines that there is some connection between the 20 crores paid and, simultaneously, companies to establish any past transactions/relationships between the two entities.
within a short span, the infusion of INR 5 crores as equity contribution by Mr. Bharose Lal. - The Auditor needs to ask for all the documents for the utilization of INR 20 crore and can
Please guide CA Sceptic in establishing this link based on the guidance available in SA 550 and investigate by visiting the parties involved and asking for confirmation directly.
SA 240.
What additional audit procedures does his team need to undertake for the conclusion? Question 4
Answer 3 If, based on additional audit procedures undertaken by CA Sceptic, it is established that there
If the auditor identifies arrangements or information that suggests the existence of related party is a likelihood of misappropriation of funds and the financial statements as a whole may be
relationships or transactions that management has not previously identified or disclosed to the materially misstated, how CA Sceptic needs to plan the future course of action?
auditors, the auditor shall determine whether the underlying circumstances confirm the existence of
those relationships or transactions.

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Answer 4 3) In the given case scenario, which is the most important red flag for auditor:
The Auditor needs to reassess the reliability of evidence previously obtained as there are doubts about (a) Expensive lifestyle
the completeness and truthfulness of representations made and about the genuineness of accounting (b) Undisclosed related party relationships to siphon off the funds.
records and documentation.
(c) Financial crunch
(a) Determine the professional and legal responsibilities applicable in the circumstances, including
(d) The dominant influence of the owners
whether there is the requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities; Ans: (b)
(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
engagement is legally permitted; and 4) Which of the following is not a fraud risk factor?
(c) If the auditor withdraws: (a) Dominant influence of the owners
(i) Discuss with the appropriate level of management and those charged with governance the auditor’s (b) Expensive lifestyle
withdrawal from the engagement and the reasons for the withdrawal; and
(c) Fraud risk due to the nature of the industry
(ii) Determine whether there is a professional or legal requirement to report to the person or persons
(d) Floating of a new SPV itself
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal. Ans: (d)
(MCQs)
1) Which of the following best describes the method that Mr. Bharose Lal can indulge to commit
fraud?
(a) Concealing and not disclosing facts that could affect the amounts recorded in financial statements.
(b) Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
(c) Causing an entity to pay for goods or services not received.
(d) Using undisclosed business partners to misappropriate funds in the garb of Making a business
transaction and thus siphoning off the funds.
Ans: (d)
2) In the given case scenario, the main factor giving rise to risk of material misstatement is:
(a) The expensive lifestyle of owners.
(b) Appointment of an auditor having experience in earthing of frauds
(c) The deteriorating financial condition of the owner’s business.
(d) The vulnerability and dependence of the foreign partner on the local partner.
Ans: (d)

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AUDIT EVIDENCE
CA Harshad Jaju
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6
CHAPTER
COMPLETION
AND REVIEW
SA 560 – Subsequent Events
Question 1
A Co. Ltd. has not included in the Balance Sheet as on 31-03-2017 a sum of ` 1.50 crores being
amount in the arrears of salaries and wages payable to the staff for the last 2 years as a result of
successful negotiations which were going on during the last 18 months and concluded on 30-04-
2017. The auditor wants to sign the said Balance Sheet and give the audit report on 31-05-2017.
The auditor came to know the result of the negotiations on 15-05-2017. Advise. (MTP 5 Marks,
March 18)
Answer 1
Subsequent Events: This case requires attention to SA 560 “Subsequent Events”, AS 4 “Contingencies
and Events occurring after the Balance Sheet Date” and AS 29 “Provisions, Contingent liabilities and
Contingent Assets”.
As per AS 4 “Contingencies and Events occurring after the Balance Sheet Date”, adjustments to assets
and liabilities are required for events occurring after the balance sheet date that provide additional
information materially affecting the determination of the amounts relating to conditions existing at the
balance sheet date. Similarly as per AS 29 “Provisions, Contingent liabilities and Contingent Assets”,
future events that may affect the amount required to settle an obligation should be reflected in the
amount of a provision where there is sufficient objective evidence that the will occur.
In the instant case, the amount of `1.50 crores is a material amount and it is the result of an event,
which has occurred after the Balance Sheet date. The facts have become known to the auditor before
the date of issue of the Audit Report and Financial Statements.
The auditor has to perform the procedure to obtain sufficient, appropriate evidence covering the period
from the date of the financial statements i.e. 31 -3-2017 to the date of Auditors Report i.e. 31-05-2017.
It will be observed that as a result of long pending negotiations a sum of ` 1.50 cores representing
arrears of salaries of the year 2015-16 and 2016-17 have not been included in the financial statements.
It is quite clear that the obligation requires provision for outstanding expenses as per AS 4 and AS 29.
As per SA 560 “Subsequent Events”, the auditor should assure that all events occurring subsequent
to the date of the financial statements and for which the applicable financial reporting framework
requires adjustment or disclosure have been adjusted or disclosed.
So the auditor should request the management to adjust the sum of ` 1.50 crores by making provision
for expenses. If the management does not accept the request the auditor should qualify the audit report.
CA Harshad Jaju
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COMPLETION AND REVIEW COMPLETION AND REVIEW
Question 2 which he was told that the said matter was going to be disclosed as a “Contingent Liability for a
M/s Krishna Associates, Chartered Accountants, while conducting the audit of Love Kush Ltd Court case” to the foot note in the balance sheet with no additional disclosures.
want to conduct an inquiry of management and those charged with governance as to whether The management told Mr. Raj that such disclosure was enough as he would further going a
any subsequent events have occurred which might affect the financial statements. Guide M/s description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his
Krishna Associates with the matters where specific inquiries may be conducted to evaluate amended audit report.
subsequent events. (MTP 4 Marks April 22) In the context of aforesaid case scenario, please answer the following questions:-
Answer 2 (a) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to his responsibilities in
Specific Inquiries to Evaluate Subsequent Events: As per SA 560, “Subsequent Events”, in accordance with SA 560, on becoming aware of the court case filed against Kolsi (P) Ltd.?
inquiring of management and, where appropriate, those charged with governance, as to whether any (RTP Nov’21)
subsequent events have occurred that might affect the financial statements, the auditor may inquire as Answer 3
to the current status of items that were accounted for on the basis of preliminary or inconclusive data
(a) As per SA 560, ‘Subsequent Events’, the auditor has no obligation to perform any audit procedures
and may make specific inquiries about the following matters:
regarding the financial statements after the date of the auditor’s report. However, when, after the
(i) Whether new commitments, borrowings or guarantees have been entered into. date of the auditor’s report but before the date the financial statements are issued, a fact becomes
(ii) Whether sales or acquisitions of assets have occurred or are planned. known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may
(iii) Whether there have been increases in capital or issuance of debt instruments, such as the issue of have caused the auditor to amend the auditor’s report, the auditor shall:
new shares or debentures, or an agreement to merge or liquidate has been made or is planned. (1) Discuss the matter with management and, where appropriate, those charged with governance.
(iv) Whether any assets have been appropriated by government or destroyed, for example, by fire or (2) Determine whether the financial statements need amendment and, if so,
flood. (3) Inquire how management intends to address the matter in the financial statements.
(v) Whether there have been any developments regarding contingencies. In the given case, on becoming aware of the court case filed against Kolsi (P) Ltd., Mr. Raj discussed
(vi) Whether any unusual accounting adjustments have been made or are contemplated. the said matter with the management and it was determined to amend the financial statements. Also,
(vii) Whether any events have occurred or are likely to occur that will bring into question the he inquired how the management intended to address the said matter in the financial statements.
appropriateness of accounting policies used in the financial statements, as would be the case, for However, If management does not take the necessary steps to ensure that anyone in receipt of the
example, if such events call into question the validity of the going concern assumption. previously issued financial statements is informed of the situation and does not amend the financial
(viii)Whether any events have occurred that are relevant to the measurement of estimates or provisions statements in circumstances where Mr. Raj (hereinafter referred as ‘the auditor’) believes they need
made in the financial statements. to be amended, the auditor shall notify management and, those charged with governance (unless all
of those charged with governance are involved in managing the entity), that the auditor will seek to
(ix) Whether any events have occurred that are relevant to the recoverability of assets.
prevent future reliance on the auditor’s report. If despite such notification the management or those
charged with governance do not take these necessary steps, the auditor shall take appropriate action
to seek to prevent reliance on the auditor’s report in accordance with SA 560.
Question 3
The audit report of Kolsi (P) Ltd. for F.Y. 2020-21 was issued by Bishnoi & Co. on 25th July,
2021. However, a case was filed against Kolsi (P) Ltd. on 4th August, 2021, with the Civil Court, Question 4
with respect to an incident caused in its factory on 17th January, 2021, the outcome of which
Ramadhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 31/03/2023.
may result in paying heavy penalty by Kolsi (P) Ltd.
The Audit Report for that year was signed by the Auditors on 04/05/2023. The Annual General
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the management Meeting was decided to be held during the month of August 2023. On 06/05/2023, the Company
and it was determined to amend the financial statements for F.Y. 2020 -21. Further, Mr. Raj had received a communication from the Central Government that an amount of₹ 5800 crores
inquired how the management intended to address the said matter in the financial statements to kept pending on account of incentives pertaining to Financial Year 2022-23 had been approved

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and the amount would be paid to the Company before the end of May 2023. To a query to Chief Question 5
Financial officer of the Company by the Board, it was informed that this amount had not been You are the auditor of PQR Ltd. which is in the business of supplying food products to various
recognized in the Audited Financial Statements in view of the same not being released before airline companies operating aircrafts in domestic circle only. As per terms of agreement with
the close of the Financial Year and due to uncertain ty of receipt. Now, having received the airlines, the company needs to stock various non-perishable food items for coming one month
amount, the Board of Directors wished to include this amount in the Financial Statements of the (average holding of inventory to the tune of INR 75 Crores). Also the payment terms have been
Company for the Financial Year ended on 31/03/2023. On 08/05/2023, the Board amended the settled and the company receives payment in 45days after the supply of goods. Everything was
accounts, approved the same and requested the Auditor to consider this event and issue a fresh going-on well till the end of March 2020 when pandemic Covid hit the world and everything
Audit Report on the Financial Statements for the year ended on 31/03/2023. Analyze the issues came to a stand still. Aviation sector was hit hard and there were no flights from April 2020
involved and give your views as to whether or not the Auditors could accede to the request of the onwards. Consequently, the business of PQR Ltd. also got severely affected and the scheduled
Board of Directors. (PYP 5 Marks, Nov’18, New SM) supplies of goods to airlines also were not made. Also, the liquidity position of airline companies
Answer 4 got hit and the scheduled payments were also not received on due dates.
Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but Before the As the auditor of PQR Ltd. what audit procedures would you perform to ensure that all
Date the Financial Statements are Issue Ads: per SA 560, “Subsequent Events”, the auditor has no subsequent events are considered, so that financial statements for the year ended 31.03.2020
obligation to perform any audit procedures regarding the financial statements after the date of the represent true and fair view? (PYP 5 Marks, Nov-20)
auditor’s report. Answer 5
However, when, after the date of the auditor’s report but before the date the financial statements are As per SA 560“Subsequent Events”, the auditor shall perform audit procedures designed to obtain
issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the sufficient appropriate audit evidence that all events occurring between the date of the financial statements
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements
(i) Discuss the matter with management and, where appropriate, those charged with governance. have been identified. The auditor is not, however, expected to perform additional audit procedures on
(ii) Determine whether the financial statements need amendment and, if so, matters to which previously applied audit procedures have provided satisfactory conclusions.
(iii) Inquire how management intends to address the matter in the financial statements. • The auditor shall perform the procedures required in above paragraph so that they cover the period from
the date of the financial statements to the date of the auditor’s report, or as near as practicable thereto.
If management amends the financial statements, the auditor shall carry out the audit procedures
necessary in the circumstances on the amendment. Further, the auditor shall extend the audit procedures Being the auditor of PQR Ltd, to ensure that all subsequent events are considered so that financial
and provide a new auditor’s report on the amended financial statements. However, the new auditor’s statements for the year ending31.03.2020 represent true and fair view, the auditor shall take into
report shall not be dated earlier than the date of approval of the amended financial statements. account the auditor’s risk assessment in determining the nature and extent of such audit procedures,
which shall include the following:
In the instant case, XYZ Company Ltd. received an amount of rupees 5800 crore on account of
incentives pertaining to year 2022-23 in the month of May 2023 i.e., after finalization of financial (a) Obtaining an understanding of any procedures management has established to ensure that
statements and signing of audit report. Board of Directors of XYZ Ltd. amended the accounts, subsequent events are identified.
approved the same and requested the Ramadhan & Co. (auditor) to consider this event and issue a (b) Inquiring of management and, where appropriate, those charged with governance as to whether
fresh audit report on the financial statements for the year ended on 31.03.2023. any subsequent events have occurred which might affect the financial statements.
After applying the conditions given in SA 560, Ramadhan & Co. can issue new audit report subject (c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged
to date of audit report which should not be earlier than the date of approval of the amended financial with governance, that have been held after the date of the financial statements and inquiring about
statements. matters discussed at any such meetings for which minutes are not yet available.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
• When, as a result of the procedures performed as required above, the auditor identifies events that
require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether
each such event is appropriately reflected in those financial statements.

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SA 570 – Going Concern Therefore, the auditor is required to Communicate the Key Audit Matters in accordance with SA
570 in above stated manner. Simple reference as to a possible cessation of business and making of
Question 1
adjustments, if any, he made at the time of cessation only by the auditor in his report is not sufficient.
(Includes concepts of SA 701- Key Audit Matters)
Rathi Limited had definite plan of its business being closed within a short period from the
Question 2
close of the accounting year ended on 31st March, 2018. The Financial Statements for the year
ended 31/03/2018 had been prepared on the same basis as it had been in earlier periods with an AQP Limited is one of the prominent players in the chemicals industry. The company is a public
additional note that the business of the Company shall cease in near future and the assets shall be company domiciled in India and listed on BSE and NSE. The Company was facing extreme
disposed off in accordance with a plan of disposal as decided by the Management. The Statutory liquidity constraints and there were multiple indicators that casted doubt over the company’s
Auditors of the Company indicated this aspect in Key Audit Matters only by a reference as to a ability to continue as a going concern.
possible cessation of business and making of adjustments, if any, thereto to be made at the time The Company was led into insolvency proceedings by consortium of banks led by PNB and
of cessation only. Comment on the reporting by the Statutory Auditor as above. (MTP 5 Marks, the NCLT ordered the commencement of corporate insolvency process against the Company
Mar 19 & May 20, PYP 5 Marks, May 18) on 31 August 2017. The company invited prospective lenders, investors and others to submit
Answer 1 their resolution plans to the Resolution Professional (RP) latest by 1 January 2018. The RP
reviewed the resolution plans and ensured conformity with Insolvency and Bankruptcy Code
Closure of Business: As per SA 570 “Going Concern”, management intentions to liquidate the entity
2016. The compliant plans were presented to Committee on Creditors (CoC) on 2 February 2018
or to cease operations is one of the event or condition that may cast significant doubt on the entity’s
and the resolution plan submitted by PQR Ltd. was evaluated as highest evaluated Compliant
ability to continue as going concern.
Resolution Plan. CoC of AQP Ltd approved the Resolution Plan submitted by PQR Ltd. on 2
As per SA 570, if events or conditions have been identified that may cast significant doubt on the entity’s March 2018. The approval of NCLT was finally obtained on 4 May 2018.
ability to continue as a going concern but, based on the audit evidence obtained the auditor concludes
PQR Ltd submitted detailed plans and commitments as part of the resolution plan including
that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of
clearance of all outstanding debts which were leading to negative cash flows.
the applicable financial reporting framework, the financial statements provide adequate disclosures
about these events or conditions. Please suggest how would you deal with this situation as the auditors of AQP Ltd. (MTP 5
Marks ,Mar 19, RTP Nov’19)
Even when no material uncertainty exists, it requires the auditor to evaluate whether, in view of
the requirements of the applicable financial reporting framework, the financial statements provide Answer 2
adequate disclosure about events or conditions that may cast significant doubt on the entity’s ability As per SA 570 Going Concern, if events or conditions have been identified that may cast significant
to continue as a going concern. doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient
Further, as per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”, appropriate audit evidence to determine whether or not a material uncertainty exists related to events
when matters relating to going concern may be determined to be key audit matters, and explains that or conditions that may cast significant doubt on the entity’s ability to continue as a going concern
a material uncertainty related to events or conditions that may cast significant doubt on the entity’s (hereinafter referred to as “material uncertainty”) through performing additional audit procedures,
ability to continue as a going concern is, by its nature, a key audit matter. SA 701 also emphasis on including consideration of mitigating factors. These procedures shall inc lude:
auditor’s responsibility to communicate key audit matters in the auditor’s report. a. Where management has not yet performed an assessment of the entity’s ability to continue as a
As per the facts given in the case, intention of the Mishti Limited had definite plan of its business going concern, requesting management to make its assessment.
being closed down within short period from 31st March, 2018. However, financial statements for the b. Evaluating management’s plans for future actions in relation to its going concern assessment,
year ended 31.03.2018 had been prepared on the same basis as it had been in earlier periods with an whether the outcome of these plans is likely to improve the situation and whether management’s
additional note. plans are feasible in the circumstances.
Thus, management intentions to liquidate the entity or to cease operations is one of the event or c. Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant
condition that may cast significant doubt on the entity’s ability to continue as going concern is a key factor in considering the future outcome of events or conditions in the
audit matter.

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i. Evaluating the reliability of the underlying data generated to prepare the forecast; and In the present case, OM Ltd. has a key customer in South Korea from which the demand for its
ii. Determining whether there is adequate support for the assumptions underlying the forecast. products has ended on account of outbreak of war, subsequent destruction and government ban on
import and export in South Korea. Further, the company has not yet i dentified new customers and is
d. Considering whether any additional facts or information have become available since the date on
in the process of doing the same. As such, the identification of new customer is a material uncertainty
which management made its assessment.
that cast a significant doubt on the company’s ability to continue as a going concern.
e. Requesting written representations from management and, where appropriate, those charged with
However, this matter is duly disclosed by the management of OM Ltd. in the financial statements for
governance, regarding their plans for future actions and the feasibility of these plans.
the year ended 31.03.2021.
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding,
As such, considering that the going concern assumption is appropriate but a material uncertainty
and shall conclude on, the appropriateness of management’s use of the going concern basis of
exists with respect to identification of new customer, CA Shanti should:
accounting in the preparation of the financial statements.
(1) Express an unmodified opinion and
If events or conditions have been identified that may cast significant doubt on the entity’s ability to
continue as a going concern but, based on the audit evidence obtained the auditor concludes that no (2) Include in his audit report, a separate section under the heading “Material Uncertainty Related to
material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the Going Concern” to:
applicable financial reporting framework, the financial statements provide adequate disclosures about (i) Draw attention to the note in the financial statements that discloses the matters and
these events or conditions. (ii) State that these events or conditions indicate that a material uncertainty exists that may cast
In the instant case, the approval of the resolution plan is a significant mitigating factor to counter significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
the going concern issues of AQP Ltd. PQR Ltd has submitted a detailed plan and commitments that opinion is not modified in respect of the matter.
has been given as part of the resolution plan which includes clearance of all outstanding debts which (iii) Thus, CA Shanti should deal with this matter in his auditor’s report in the above mentioned
were leading to negative cash flows. Therefore, it can be said that the company that the events and manner.
conditions are mitigated effectively and there is no material uncertainty in relation to the ability of the
company to continue as a going concern.
Question 4
(Includes concepts of SA 705- Modification of Opinion)
Question 3
CA.K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for the
OM Ltd. is a company engaged in the business of manufacture of spare parts. Shanti & Associates
first time.
are the statutory auditors of the company for the FY 2020-21. During the course of audit, CA
Shanti noticed that the company had a major customer, namely, Korean Mart from South Korea. The company is preparing its accounts keeping in view applicable requirements of Division II
Owing to an outbreak of war and subsequent destruction leading to government ban on import of Schedule III of Companies Act, 2013. On scrutiny of financial statements of company put up
and export in South Korea, the demand from Korean Mart for the products of OM Ltd. ended for audit, it was noticed that notes to accounts show ageing of trade payables as per amended
for an unforeseeable time period. When discussed with the management, CA Shanti was told requirements of Schedule III of the Companies Act, 2013. The ageing schedule forming part of
that the company is in the process of identifying new customers for their products. CA Shanti notes is as under: - Outstanding for following periods from due date of payment (` In crore)
understands that though the use of going concern assumption is appropriate but a material
More than 3
uncertainty exists with respect to the identification of new customers. This fact is duly reflected Particulars Less than 1 year 1-2 years 2-3 years Total
years
in the financial statements of OM Ltd. for the FY 2020-21. How should CA Shanti deal with MSME NIL NIL NIL NIL NIL
this matter in the auditor’s report for the FY 2020-21 in accordance with relevant Standard on
Others 2 4 3 1 10
Auditing? (MTP 5 Marks Nov 21 & April ‘23)
Disputed dues-
Answer 3 NIL NIL NIL NIL NIL
MSME
As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the operating Disputed dues-
NIL NIL NIL NIL NIL
indicators that may cast significant doubt on the company’s ability to continue as a going concern. others

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Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit to pay its creditors on time. Even statutory dues payable by the company are either not paid
ratio disclosed in notes to accounts have slipped drastically as compared to last year and from or being paid after a gap of 5 -6 months, leading to extra costs. Due to declining revenue, the
standard norms. company cannot cover its fixed costs and has begun laying off employees.
Most of the key financial ratios are in red. There is no other relevant information concerning Considering all these circumstances, CA P doubts the company’s ability to continue as
above in notes to accounts. a going concern while conducting the statutory audit for the year 2022 -23. He is studying
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), management’s assessment of the company’s ability to continue as a going concern by studying
it was noticed that there is no debit transaction in the month of March,2022. On inquiry, he projected profitability statements for the next two years containing turnover, expenses and
came to know that stock audit of company was conducted in the month of January,2022 and profits estimates. Comment on the above situation with specific reference to audit procedures
stock auditors have commented vide their report dated 25.2.2022 that company had negative being performed by CA P in context of relevant Standards on Auditing. (MTP 5 Marks Oct ‘23)
drawing power due to high creditors. Accordingly, the bankers have refused further debits in Answer 5
cash credit account from start of March,2022. There is no information in this respect in financial The indicated events or conditions in MZE Limited may cast significant doubt on ability of company
statements and notes to accounts. Discuss how CA K should deal with above for reporting in his to continue as going concern. SA 570 requires that if events or conditions have been identified that
audit report under the Companies Act, 2013. (MTP 5 Marks Oct ‘22) may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall
Answer 4 obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists
In the given situation, it is clear from the ageing schedule that company is not able to pay its creditors related to events or conditions that may cast significant doubt on the entity’s ability to continue as a
on time. Outstanding to creditors for a period of 1 year or more account for 80% of total dues to the going concern through performing additional audit procedures, including consideration of mitigating
creditors of the company from due date of payment. Most of key financial ratios are adverse. factors.
Further, bankers have refused further debits in cash credit account due to negative drawing power In the given situation, the auditor is studying management’s assessment of the company’s ability
from March 2022. Cash credit loans are repayable on demand. There is no other information or to continue as going concern, including its future plan of action containing projected profitability
disclosure available how the company plans to run its business without bank finance. statements for the next two years containing estimates of turnover, expenses and profits. However,
as required in SA 570, auditor’s procedures should focus on cash flow forecast and not on future
All the above factors are indicators that a material uncertainty exists that may cast a significant doubt
profit projections. It is quite possible that a company may continue to carry on as a going concern so
on the company’s ability to continue as going concern. There is no express disclosure of this fact in
long as it can meet its liabilities. Therefore, analysing the projected profitability statements alone is
financial statements.
insufficient to support the conclusion on the going concern assumption followed by the company.
Therefore, it is a situation where material uncertainty exists which has cast a significant doubt on
Therefore, the auditor should require management to prepare a cash flow forecast in the given
company’s ability to continue as going concern in accordance with SA 570, “Going Concern”.
circumstances. The auditor should then analyse the cash flow forecast in the evaluation of management’s
Keeping in view above the fact that although a material uncertainty exists casting a significant doubt future plan of action. It includes: -
on the ability of company to continue as going concern, adequate disclosure of material uncertainty
(i) Evaluating the reliability of the underlying data generated to prepare the forecast and
is not made in financial statements, CA K shall give qualified or adverse opinion in accordance with
SA-705, “Modifications to the Opinion in the Independent Auditor’s Report”. (ii) Determining whether there is adequate support for the assumptions underlying the forecast
Further, some major overseas payments of the company are stuck up. It is quite possible that the
timing of cash inflows on account of these payments may affect the situation. The auditor would have
Question 5 to evaluate the reliability of data for preparation for such a forecast and its underlying assumptions.
MZE Limited is engaged in the manufacturing and export of ready-made garments. The He should perform procedures to obtain evidence regarding assumptions and timing of cash inflows
company has lost overseas buyers to Asian competitors with lower raw materials and labour and outflows like any restructuring undertaken by bankers providing relief to the company, future
costs. As a result, MZE Limited has lost out on a significant chunk of export orders, and the sales and consequent cash realization in downturn conditions, willingness of creditors to provide
trend has become more pronounced in the year 2022-23. Further, the US economic recession credit in such a situation, incurring of expenditures to keep the company afloat. All these assumptions
caused delays in the company’s overseas payments, leading to the company being unable to underlying such cash flow forecasts need to be challenged and examined.
keep its loan repayment commitments with bankers. Further, the company has not been able

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M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into (a) Joy Ltd. is an entertainment company which runs a circus and travels around the country
continuous financial losses as well as reduction in Sales due to stiff competition and frequent to entertain the masses. The circus began losing its popularity over the past few years and
break down of its own aircrafts. The Financial Statements for the Year ended on 31/03/2023 are attendance has reportedly dropped by as much as 75% in the current financial year. Animal
to be now finalized. The Management is quite uncertain as to its ability to continue in near future rights activists continuously targeted the circus for its use of animal creatures like elephants
and has informed the Auditors that having seized of this matter, it had constituted a committee in the show. The CEO noted that the audience seemed to be abandoning the circus due to
to study this aspect and to give suggestions for recovery, if any, from this bad situation. Till the their expanding entertainment options. The high cost of moving the show from city to city
study is completed, according to the Management, the issue involves uncertainty as to its ability to eventually made the business model untenable. As a result, many key managerial personnel
continue its business and it informs the Auditor that the fact of uncertainty clamping on the “Going of the company left the company, there were delays in the payment of wages and salaries,
Concern” would suitably be disclosed in notes to accounts. State the reporting requirement if any, and the bank from whom the company had taken funds also decided not to extend further
in the Independent Auditor’s Report in respect of this matter. (PYP 5 Marks Nov’18, New SM) finance or to fund further working capital requirements of the company.
Answer 6 When discussed with the management, the statutory auditor understood that the company had no
Reporting requirements in case of Uncertainty clamping on the Going ConcAesrpne:r SA 570 “Going action plan to mitigate such circumstances (Use of going concern assumption is inappropriate).
Concern”, if the auditor concludes that management’s use of the going concern basis of accounting Further, all such circumstances were not reflected in the financial statements of Joy Ltd. What
is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine course of action should the statutory auditor of the company take in the auditor’s report in such
whether the financial statements : (i)adequately disclose the principal events or conditions that may situation? (PYP 5 Marks May ‘23)
cast significant doubt on the entity’s ability to continue as a going concern and management’s plans Answer 7
to deal with these events or conditions; and (ii) disclose clearly that there is a material uncertainty
(a) SA 570, “Going Concern”, deals with the auditor’s responsibilities in the audit of financial
related to events or conditions that may cast significant doubt on the entity’s ability to continue as a
statements relating to going concern and the implications for the auditor’s report.
going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in
the normal course of business. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and
conclude on, the appropriateness of management’s use of the going concern basis of accounting in
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor
the preparation of the financial statements, and to conclude, based on the audit evidence obtained,
shall express an unmodified opinion and the auditor’s report shall include a separate section under the
whether a material uncertainty exists about the entity’s abilit y to continue as a going concern.
heading “Material Uncertainty Related to Going Concern” to:
When the use of going concern basis of accounting is inappropriate i.e., if the financial statements
(i) Draw attention to the note in the financial statements that discloses the matters set out above; and
have been prepared using the going concern basis of accounting but in the auditor’s judgment,
(ii) State that these events or conditions indicate that a material uncertainty exists that may cast management’s use of the going concern basis of accounting in the preparation of the financial
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion statements is inappropriate, the auditor shall express an adverse opinion.
is not modified in respect of the matter.
Also, when adequate disclosure of a material uncertainty is not made in the financial statements the
In the instant case, M/s Aircraft Ltd. is running into continuous financial losses as well as reduction auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with SA
in sales due to stiff competition and frequent break down of its own aircrafts and management of 705 (Revised); and in the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state
Aircraft Ltd. is uncertain as of its ability to continue in near future. Therefore, a committee has been that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as
constituted to study this aspect and till the time study is completed management accordingly decided a going concern and that the financial statements do not adequately disclose this matter.
to suitable disclose this aspect in notes to accounts. Therefore, the auditor should disclose about the
In the present case, the following circumstances indicate the inability of Joy Ltd. to continue as a
material uncertainty and express an unmodified opinion and in his audit report shall include a separate
going concern:
section under the heading “Material Uncertainty Related to Going Concern” to draw attention to the
note in the financial statements that discloses the matters set out above; and state that these events or • Losing popularity over the past few years.
conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s • Animal Rights activists continuously targeting the circus.
ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the
• Audience abandoning the circus due to their expanding entertainment options.
matter.
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• High Cost of moving the show from city to city making the business model untenable. Question 2
• Key Managerial Personnel leaving the Company. Which of the following is not an indicator about material uncertainty over the entity’s ability to
• Banks decided not to extend further finance and not to fund the working capital requirements of the continue as a going concern:
Company. (a) Net liability or net current liability position.
• Non availability of sound action plan to mitigate such circumstances. (b) Cancellation of company’s production license due to change on government policies.
Therefore, considering the above factors it is clear that the going concern basis is inappropriate for the (c) Non-declaration of dividend to equity shareholders.
Company. Further, such circumstances are not reflected in the financial statements of the Company. (d) Substantial operating losses or significant deterioration in the value of assets used to generate cash
As such, the statutory auditor of Joy Ltd. should: flows. (MTP 1 Mark March 22)
(1) Express an adverse opinion in accordance with SA 705 (Revised) and Ans: (c)
(2) In the Basis of Adverse Opinion paragraph of the auditor’s report, the statutory auditor should state
that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
The auditor is also required to report as per clause (xix) of CARO 2020 that on the basis of the financial
ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities,
other information accompanying the financial statements, the auditor’s knowledge of the Board of
Directors and management plans, whether the auditor is of the opinion that no material uncertainty
exists as on the date of the audit report that company is capable of meeting its liabilities existing at the
date of balance sheet as and when they fall due within a period of one year from the balance sheet date.

Question 1
The auditor has determined that there is a significant going concern uncertainty at PQR Ltd. due to
the requirement to refinance the company’s debt. Discussions with the management and the auditor’s
evaluation of management’s plans for future actions in relation to its going concern assessment have
revealed that plans to raise new equity finance are realistic and likely to deal with the problem. Is it
appropriate for PQR Ltd. to prepare its financial statements on a going concern basis?
(a) No, PQR Ltd. cannot prepare its financial statements on a going concern basis because a significant
uncertainty exists.
(b) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. However, the auditor
is required to express a qualified opinion.
(c) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. No additional
disclosure is necessary in the financial statements or the auditor’s report.
(d) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. However, disclosure
of both the nature of the uncertainty and management’s plan is required. (MTP 2 Marks, April 19)
Ans:(d)

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SA 580 – Written Representation Question 1
Question 1 Ramadhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 31/03/2023.
The Audit Report for that year was signed by the Auditors on 04/05/2023. The Annual General
Mokshda & Co is the statutory auditor of Get My Trip Ltd. The company is in the business of
Meeting was decided to be held during the month of August 2023. On 06/05/2023, the Company
tours and travels. Annual turnover of the company is INR 2765 crore and profits are INR 285
had received a communication from the Central Government that an amount of₹ 5800 crores kept
crore. During the planning meeting of the management and the auditors, it was discussed that the
pending on account of incentives pertaining to Financial Year 2022-23 had been approved and the
management needs to provide written representation letter to the auditors for the preparation
amount would be paid to the Company before the end of May 2023. To a query to Chief Financial
of the financial statements and for the completeness of the information provided to the auditor.
officer of the Company by the Board, it was informed that this amount had not been recognized
At the time of closure of the audit, there has been some confusion about the requirements of the
in the Audited Financial Statements in view of the same not being released before the close of the
written representation letter.
Financial Year and due to uncertain ty of receipt. Now, having received the amount, the Board
Management argued that representation need not be written, it can also be verbal which has of Directors wished to include this amount in the Financial Statements of the Company for the
been provided to the audit team during the course of their audit. Auditors have completed Financial Year ended on 31/03/2023. On 08/05/2023, the Board amended the accounts, approved
their documentation and hence in a way, representation based on verbal discussions with the the same and requested the Auditor to consider this event and issue a fresh Audit Report on the
auditors has also got documented. Auditors explained that this is mandatory to obtain written Financial Statements for the year ended on 31/03/2023. Analyze the issues involved and give your
representation in accordance with the requirements of SA 580. However, still some confusion views as to whether or not the Auditors could accede to the request of the Board of Directors.
remains regarding the date and period covered by the written representation. You are required
Answer 1
to advise about the date of and period covered by written representation in view of SA 580.
(MTP 4 Marks, March 21, RTP May’19, New SM) Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but Before the
Date the Financial Statements are Issue Ads: per SA 560, “Subsequent Events”, the auditor has no
Answer 1
obligation to perform any audit procedures regarding the financial statements after the date of the
As per SA 580, “Written Representations”, as written representations are necessary audit evidence, auditor’s report.
the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of
However, when, after the date of the auditor’s report but before the date the financial statements are
the written representations. Furthermore, because the auditor is concerned with events occurring up to
issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the
the date of the auditor’s report that may require adjustment to or disclosure in the financial statements,
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall
the written representations are dated as near as practicable to, but not after, the date of the auditor’s
report on the financial statements. In some circumstances it may be appropriate for the auditor to (i) Discuss the matter with management and, where appropriate, those charged with governance.
obtain a written representation about a specific assertion in the financial statements during the course (ii) Determine whether the financial statements need amendment and, if so,
of the audit. Where this is the case, it may be necessary to request an updated written representation.
(iii) Inquire how management intends to address the matter in the financial statements.
The written representations are for all periods referred to in the auditor’s report because management
If management amends the financial statements, the auditor shall carry out the audit procedures
needs to reaffirm that the written representations it previously made with respect to the prior periods
necessary in the circumstances on the amendment. Further, the auditor shall extend the audit procedures
remain appropriate. The auditor and management may agree to a form of written representation that
and provide a new auditor’s report on the amended financial statements. However, the new auditor’s
updates written representations relating to the prior periods by addressing whether there are any
report shall not be dated earlier than the date of approval of the amended financial statements.
changes to such written representations and, if so, what they are.
In the instant case, XYZ Company Ltd. received an amount of rupees 5800 crore on account of
Situations may arise where current management were not present during all periods referred to in the
incentives pertaining to year 2022-23 in the month of May 2023 i.e., after finalization of financial
auditor’s report. Such persons may assert that they are not in a position to provide some or all of the
statements and signing of audit report. Board of Directors of XYZ Ltd. amended the accounts,
written representations because they were not in place during the period. This fact, however, does not
approved the same and requested the Ramadhan & Co. (auditor) to consider this event and issue a
diminish such persons’ responsibilities for the financial statements as a whole.
fresh audit report on the financial statements for the year ended on 31.03.2023.
Accordingly, the requirement for the auditor to request from them written representations that cover
After applying the conditions given in SA 560, Ramadhan & Co. can issue new audit report subject
the whole of the relevant period(s) still applies.
to date of audit report which should not be earlier than the date of approval of the amended financial
statements.
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M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into PRSH & Co is the statutory auditor of Make My journey Ltd. The company is in the business
continuous financial losses as well as reduction in Sales due to stiff competition and frequent of tours and travels. Annual turnover of the company is INR 2000 crores and profits are INR
break down of its own aircrafts. The Financial Statements for the Year ended on 31/03/2023 are 190 crores. During the planning meeting of the management and the auditors, it was discussed
to be now finalized. The Management is quite uncertain as to its ability to continue in near future that the management needs to provide written representation letter to the auditors for the
and has informed the Auditors that having seized of this matter, it had constituted a committee preparation of the financial statements and for the completeness of the information provided
to study this aspect and to give suggestions for recovery, if any, from this bad situation. Till to the auditor. At the time of closure of the audit, there has been some confusion about the
the study is completed, according to the Management, the issue involves uncertainty as to its requirements of the written representation letter.
ability to continue its business and it informs the Auditor that the fact of uncertainty clamping Management argued that representation need not be written, it can also be verbal which has
on the “Going Concern” would suitably be disclosed in notes to accounts. State the reporting been provided to the audit team during the course of their audit. Auditors have completed
requirement if any, in the Independent Auditor’s Report in respect of this matter. their documentation and hence in a way, representation based on verbal discussions with the
Answer 2 auditors has also got documented. Auditors explained that this is mandatory to obtain written
Reporting requirements in case of Uncertainty clamping on the Going Concern : As per SA 570 “Going representation in accordance with the requirements of SA 580. However, still some confusion
Concern”, if the auditor concludes that management’s use of the going concern basis of accounting remains regarding the date and period covered by the written representation. You are required
is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine to advise about the date of and period covered by written representation in view of SA 580.
whether the financial statements : (i)adequately disclose the principal events or conditions that may Answer 3
cast significant doubt on the entity’s ability to continue as a going concern and management’s plans As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
to deal with these events or conditions; and (ii) disclose clearly that there is a material uncertainty the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of
related to events or conditions that may cast significant doubt on the entity’s ability to continue as a the written representations. Furthermore, because the auditor is concerned with events occurring up to
going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the date of the auditor’s report that may require adjustment to or disclosure in the financial statements,
the normal course of business. the written representations are dated as near as practicable to, but not after, the date of the auditor’s
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor report on the financial statements.
shall express an unmodified opinion and the auditor’s report shall include a separate section under the In some circumstances it may be appropriate for the auditor to obtain a written representation about
heading “Material Uncertainty Related to Going Concern” to: a specific assertion in the financial statements during the course of the audit. Where this is the case, it
(i) Draw attention to the note in the financial statements that discloses the matters set out above; and may be necessary to request an updated written representation.
(ii) State that these events or conditions indicate that a material uncertainty exists that may cast The written representations are for all periods referred to in the auditor’s report because management
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion needs to reaffirm that the written representations it previously made with respect to the prior periods
is not modified in respect of the matter. remain appropriate. The auditor and management may agree to a form of written representation that
In the instant case, M/s Aircraft Ltd. is running into continuous financial losses as well as reduction updates written representations relating to the prior periods by addressing whether there are any
in sales due to stiff competition and frequent break down of its own aircrafts and management of changes to such written representations and, if so, what they are.
Aircraft Ltd. is uncertain as of its ability to continue in near future. Therefore, a committee has been Situations may arise where current management were not present during all periods referred to in the
constituted to study this aspect and till the time study is completed management accordingly decided auditor’s report. Such persons may assert that they are not in a position to provide some or all of the
to suitable disclose this aspect in notes to accounts. Therefore, the auditor should disclose about the written representations because they were not in place during the period. This fact, however, does
material uncertainty and express an unmodified opinion and in his audit report shall include a separate not diminish such persons’ responsibilities for the financial statements as a whole. Accordingly, the
section under the heading “Material Uncertainty Related to Going Concern” to draw attention to the requirement for the auditor to request from them written representations that cover the whole of the
note in the financial statements that discloses the matters set out above; and state that these events or relevant period(s) still applies.
conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s
ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the
matter.
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Question 4 Answer 5
“Move Fast Limited” is engaged in the manufacturing of shoes and slippers located in In the given situation, dividend has been proposed by Board of Directors on 17th April, 2023. It is
Bahadurgarh in Haryana. Due to unprecedented rains in the area in the month of September an example of condition that arose after the reporting period. No liability exists for the company on
2022, many areas of the town got inundated due to the choking of sewer systems. As a result of reporting date because there is no obligation to pay at the reporting date in accordance with Ind AS 1.
the above, the company’s premises located in town were also affected, resulting in damage of Therefore, above situation does not require recognition of above proposed dividend in financial
stocks. statements. It is an example of events which does not require adjustments. However, it should be
The company has lodged a claim with the insurance company for ₹1 crore, and the same is disclosed in financial statements in notes to accounts. Therefore, it should be ensured that it is disclosed
shown as a claim receivable as of 31st March 2023, as the claim was not settled at year end. in notes to accounts in financial statements. He should verify in accordance with SA 560 that it is so
The insurance surveyor appointed in the case submitted a report to the insurance company disclosed in notes to accounts.
recommending a claim of ₹45 lacs in the month of April 2023. The company has also given its
consent for the same, and the settled amount of ₹45 lacs was transferred to the bank account of
Question 6
the company on 15th May 2023.
CA. Somya is auditor of a company engaged in rearing of poultry birds and obtaining eggs
You have just finished performing substantive procedures of the company by the end of May
therefrom. The company has performed very well since its incorporation in 2013. Its sales
2023. Is there any responsibility cast upon you as auditor of the company in the above situation?
had also grown and the company had expanded its market from the native northern state of
Answer 4 promoters to far-flung areas in eastern parts of country.
The given situation provides evidence of conditions that existed at the date of financial statements. However, since last two years, company’s fortunes have nosedived. First, due to the effects of
Initially, the company had lodged claim of ₹1 crore and the same is reflected as claim receivable in the pandemic and then due to recurrent outbreaks of bird flu thrice in a span of two years. The
financial statements as on 31st March, 2023. company’s sales have dipped from around ₹ 50 crores to ₹10 crores. Further, a major part of
However, subsequent events occurring have provided evidence that claim was settled for ₹ 45 lacs its livestock was also wiped off during bird flu. She is not optimistic about the going concern
only. Such settled amount has already been accepted by the company by providing its consent. assumption followed by management.
Therefore, such events have provided fresh information about items included in financial statements. The management now wants to start with new batches of birds. The earlier working capital
Further, performance of substantive procedures has been finished implying that audit report is not yet facilities of the company granted by bank have also been restructured to support the business.
issued. She was informed that the repayments of restructured working capital term loans are to begin
from ensuing year. No fresh credit facilities have been granted by the bank. The company also
Therefore, financial statements as on 31st March, 2023 should be adjusted to reflect fresh information
plans longer credits from animal feed suppliers.
emanating from described events and management should be asked to take appropriate action in
this regard so that adjustment pertaining to above is properly reflected in financial statements in The company plans to take additional measures to prevent the safety of live stocks, including
accordance with applicable financial reporting framework. aggressive vaccination, preventive health check-ups, and more frequent visits of veterinary staff.
The villagers in surrounding areas have accused the company of spreading air pollution.
Question 5 The management has prepared a cash flow forecast for her examination. Discuss the approach
to be adopted by her in examining the “going concern” assumption keeping in view above with
CA Anuj is the auditor of a listed company, and he is in the midst of conducting an audit of
specific reference to cash flow forecast.
the said company for the financial year ending 31St March 2023. At a meeting of the Board of
Directors held on 17th April 2023, a dividend of ₹1 crore is proposed to equity shareholders @ Answer 6
₹10/- per share, and such a proposal has a good chance of being approved in the AGM of the In accordance with SA 570,”Going Concern”, if events or conditions have been identified that may
company to be held after few months. cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain
His audit procedures are near completion. He is contemplating finalizing the audit report by 31st sufficient appropriate audit evidence to determine whether or not a material uncertainty exists related
July 2023. Is there any responsibility thrust upon him as auditor of the company? to events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern by performing additional audit procedures, including consideration of mitigating factors.
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Where the entity has prepared a cash flow forecast, and analysis of forecast is a significant factor in inappropriateness of its use of going concern assumption of accounting.
considering the future outcome of events or conditions in the evaluation of management’s plans for How should it impact the auditor’s opinion in case management itself discloses the
future actions, it includes inappropriateness of its use of going concern assumption of accounting now?
(i) Evaluating the reliability of the underlying data generated to prepare the forecast and Answer 7
(ii) Determining whether there is adequate support for the assumptions underlying the forecast. If the financial statements have been prepared using the going concern basis of accounting but, in
In the above situation, cash flow forecast has been prepared by management. Therefore, she should the auditor’s judgment, management’s use of the going concern basis of accounting in the financial
carefully evaluate assumptions underlying forecast and also reliability of data to prepare the forecast. statements is inappropriate, the auditor shall express adverse opinion.
For example: - The requirement for an auditor to express an adverse opinion applies regardless of whether or not the
• She should verify assumption regarding fresh batch of livestock. The bankers have not provided financial statements include disclosure of the inappropriateness of management’s use of the going
fresh credit facilities. How funds from the same would be arranged? The reasonability of assumption concern basis of accounting. Therefore, even if management discloses that its use of going concern
in cash flow forecast needs to be looked into. assumption of accounting is inappropriate, it would have no impact on auditor’s opinion. He would
• She needs to check loan sanction letters/agreement to verify when repayments are beginning to see need to express adverse opinion.
their accuracy in cash flow forecasts.
• The company plans to avail longer credits from animal feed suppliers. In the downturn situation of Question 8
the company, how would suppliers extend longer credits? This is going to have effect on the cash
Following is a written representation given by RES Limited to its statutory auditors i.e. M/s
flow forecast.
CTK & Associates for audit of financial year 2022-23. The audit was completed and report
• Whether company has accounted for increased expenditure on preventive health check-up, dated 31.7.23 was issued.
vaccination and more frequent visits of veterinary staff in cash flow forecast.
Point out, if there is any, anomaly in written representation reproduced below. 15th April, 2023
• Since villagers have accused the company of spreading air pollution, how does the company plan
To
to deal with the same? Whether any proposed expenditure in this regard is accounted for in the cash
flow statement. She may also consider other implications of this issue and possible effect on cash CTK & Associates
flows. Chartered Accountants
Dear Sir,
Question 7 This representation letter is provided in connection with your audit of the financial statements
of RES Limited for the year ended March 31, 2023 for the purpose of expressing an opinion as
CA Sooraj finds that key financial ratios of a company, like current ratio, debt-service coverage
to whether the financial statements give a true and fair view in accordance with the applicable
ratio, inventory turnover ratio, and trade receivables turnover ratio, are in red and have
accounting standards in India.
deteriorated considerably as compared to last year. The company is also not able to pay to its
creditors on time. The company is requesting time and again to its bankers to grant additional We confirm that (to the best of our knowledge and belief, having made such inquiries as we
credit facilities, but bankers are not listening. considered necessary for the purpose of appropriately informing ourselves):
There have been significant losses to the company due to the lack of response of the company’s Financial Statements
products in the market. As a result of it, many products are sold at below cost price. There have We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated 17th
been situations where the company is not able to pay the salaries of staff on time. August
All these negative findings have led him to conclude that the use of going concern as the basis of 2022 for the preparation of the financial statements in accordance with financial reporting
accounting is not appropriate. He brings this matter to the knowledge of CFO of the company. Standards, in particular, the financial statements give a true and fair view in accordance with
What is reporting duty cast upon him in such a scenario? the applicable accounting standards in India.
The CFO informs him that the management, in turn, is ready to include in the disclosures the Significant assumptions used by us in making accounting estimates, including those measured

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at fair value, are reasonable. Answer 8

Related party relationships and transactions have been appropriately accounted for and The date of the written representations shall be as near as practicable to, but not after, the date of the
disclosed in accordance with the requirements of applicable accounting standards in India. (SA auditor’s report on the financial statements. As the auditor is concerned with events occurring up to
550) the date of the auditor’s report that may require adjustment to or disclosure in the financial statements,
All events subsequent to the date of the financial statements and for which applicable accounting the written representations are dated as near as practicable to, but not after, the date of the auditor’s
standards in India require adjustment or disclosure have been adjusted or disclosed. (SA 560) report on the financial statements.
The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, In the given situation, written representation is dated 15th April 2023. The audit report is dated 31st
to the financial statements as a whole. A list of the uncorrected misstatements is attached to the July 2023. There is a considerable lag between date of written representations and date of audit report.
representation letter. (SA 450) It could signify that all subsequent events after date of financial statements requiring adjustments or
Information provided disclosure may not have been adjusted or disclosed in the financial statements by management.
We have provided you with: - As audit report is dated 31St July, 2023, it reflects that auditor has considered subsequent events
occurring between date of financial statements and date of auditor’s report. However, written
Access to all information of which we are aware that is relevant to the preparation of the financial
representations pertain to 15th April 2023.
statements such as records, documentation and other matters;
Additional information that you have requested from us for the purpose of the audit; and
Unrestricted access to persons within the entity from whom you determined it necessary to Case Study
obtain audit evidence. Infinity Hospitality Private Limited was established in 1996 and was in the business of running
All transactions have been recorded in the accounting records and are reflected in the financial hotels in tourist destinations in state of Kerala. It took leased properties on long-term leases
statements. ranging from 10 to 12 years, most with a lock-in of a whole term. The terms did not cover the force
majeure clause The company was family-owned business and had created a good reputation as
We have disclosed to you the results of our assessment of the risk that the financial statements
value for a money- budget hotel. Most of the time, hotels clocked 60 to 75% occupancy rate, and
may be materially misstated as a result of fraud.
during the festive season/ vacations, hotel business clocked 100% Occupancy.
We have disclosed to you all information in relation to fraud or suspected fraud that we are
The capital structure of the company was debt oriented and over-leveraged.
aware of and that affects the entity and involves: -
Primary working capital was blocked in maintaining and upkeeping the leased properties,
Management;
running the restaurant, leases, food and beverages, salary, Director’s remuneration etc.
Employees who have significant roles in internal control; or
The owners looked at the business as a cash cow and did not plough back the funds to expand
Others where the fraud could have a material effect on the financial statements. the business but were content with the decent profits the hotels were generating.
We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, As the properties were leased and not owned, most of the cash flow generated from operations
affecting the entity’s financial statements communicated by employees, former employees, was used in servicing the property and huge loans from financial institutions. What was left was
analysts, regulators or others. withdrawn as Directors’ remuneration and dividend.
We have disclosed to you all known instances of non-compliance or suspected non- compliance Everything was going on smoothly. However, there were flash floods in Kerala due to
with laws and regulations whose effects should be considered when preparing financial unprecedented rains. There were landslides and roads were blocked. The entire tourist season
statements. was washed away due to infrastructural challenges. Accessibility to resorts and hotels was badly
We have disclosed to you the identity of the entity’s related parties and all the related party hindered. Logistics support took time to reach in far flung areas. Visit to the “The God’s own
relationships and transactions of which we are aware. (SA 550) countryw” as last on the mind of tourists. The company was hardly trying to get back to some
semblance of normalcy when pandemic struck. It was double whammy for the company.
Chief Financial Officer
The impact on travel, tourism and hospitality business was very severe. The management of

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Infinity Hospitality Private Limited believed that bad days would end soon and the business whether the outcome of these plan is likely to improve the situation and whether the management’s
would be back to normal. They also were optimistic about the government coming up with plans are feasible in the circumstances.
support for the industry and were hopeful of negotiating with lessors and Financial Institutions • Evaluating management’s plans for future actions may include inquiries of management as to
for relief. They decided on humanitarian grounds not to terminate the employees and continued its plan for future action, including, for example, its plan to liquidate assets, borrow money or
paying them a regular salary, maybe deferring 25% to be paid after one year. The immediate restructure debt, reduce or delay expenditures, or increase capital.
fallout was on the top line as suddenly, the business stopped.
• Considering whether any additional facts or information have become available since the date on
The auditors, M/s XYZ and Associates, were conducting the audit of the company and were grappling which management made it assessment.
with the situation and are seeking your guidance for the course of action they need to follow.
• Requesting written representation from management and, where appropriate, those charged with
Based on the case scenario, you are required to provide your answers to the following: - governance, regarding their plans for future actions and the feasibility of these plans.
What additional audit procedures must the auditor undertake as per requirements of SA 570 According to your judgment, what risk assessment procedures should the auditor consider for
based on the facts given in the case? arriving at a conclusion based on the management assertion of the entity being Going Concern?
Answer 1 Answer 2
In the given case scenario, the events and conditions have been identified which cast significant When performing risk assessment procedures as required by SA-315, the auditor shall consider
doubt on the entity’s ability to continue as a Going Concern, the auditor needs to obtain sufficient whether events or conditions exist that may cast significant doubt on the entity’s ability to continue
appropriate audit evidence to determine whether or not material uncertainty and gather evidence the going concern. In so doing, the auditor shall consider whether management has already performed
including of mitigating factors. It can be done by performing following additional procedures: - a preliminary assessment of the entity’s ability to continue as a going concern.
• Analyzing and discussing cash flow, profit and other relevant forecast with management. • The auditor shall discuss the assessment with management and determine whether management
• Analyzing and discussing the entity’s latest available interim financial statement. has identified events and conditions that, individually or collectively, cast significant doubt on the
• Reading the terms of loan agreements and determining whether any have been breached. entity’s ability to continue as a going concern and if so, management’s plan to address them.
• Reading minutes of the meetings of shareholders, those charged with governance and relevant • The auditor shall specifically draw attention of Management on following events or condition and
committees for reference to financing difficulties. get the response on how they plan to address them:
• Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the The company is debt heavy and over leveraged. The leased properties are having considerable lock-
reasonableness of management’s assessments of their outcome and the estimate of their financial in period with absence of force majeure clause. There are no contingency reserves available with
implications. company.
• Confirming the existence, legality and enforceability of arrangements to provide or maintain All these factors shall be taken into account while performing risk assessment procedures.
financial support with related and third party and assessing the financial ability of such parties to
provide additional funds.
Question 3
• Performing audit procedures regarding subsequent events to identify those that either mitigate or
What should be approach of the auditor if the management agrees that the material uncertainly
otherwise affect the entity’s ability to continue as a going concern.
exists, but the entity is a Going Concern? Also discuss reporting requirements
• Confirming the existence, terms and adequacy of borrowing facilities.
Answer 3
• Where management has not yet performed an assessment of the entity’s ability to continue as a
If the auditor concludes that the management’s use of going concern basis of accounting is appropriate in the
going concern, requesting management to make its assessment.
circumstances but a material uncertainty exists, the auditors shall determine whether the financial statements:
• Evaluating management’s plans for further actions in relation to its going concern assessment,
(a) Adequately disclose the principal events or conditions that make a significant doubt on the

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entity’s ability to continue as a going concern and management’s plan to deal with these events Multiple Choice questions
or conditions, and 1. Which of the following is not a financial event/ conditionate may cast significant doubt on
(b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast companies’ ability to continue as a going concern as per SA 570?
significant doubt on entity’s ability to continue as a going concern and therefore, that it may be (a) Change from credit to cash on delivery model with suppliers
unable to realize its assets, and discharge its liabilities in the normal course of business.
(b) Arrears or discontinuance of dividend
(c) The disclosures may include:
(c) Opening of a new chain of hotels by renowned competitor near the entity’s area
i. Management’s evaluation of the significance of the events or conditions relating to the entity’s
(d) Adverse key financial ratios
ability to meet its obligations; or
Ans: (c)
ii. Significant judgements made by management as a part of its assessment of the entity’s ability to
continue as a going concern
iii. Disclosures about the magnitude of the potential impact of the principal events or conditions, 2. Please choose the mitigating measure as the management is unable to pay lease rentals.
and the likelihood and timing of the occurrence. (a) Cancel the lease
iv. The auditor shall express and unmodified opinion and the auditor’s reports shall include a (b) Restructure the lease agreement and negotiate for deferment and relief
separate section under the heading “Material Uncertainty Related to Going Concern” to:
(c) Terminate the employees and pay the lessor
• Draw attention to the note in the financial statement that discloses the events or conditions and
(d) All the above
• State that these events are conditions indicate that a material uncertainty exists that may cast
Ans: (b)
significant doubt on the entity’s ability to continue as a going concern and the auditor’s opinion
is not modified in respect of the matter and how the matter was addressed in the audit.
3. Which one of the following is not a responsibility of the auditor relating to communicating
events or conditions identified that may cast significant doubt on the entity’s Going Concern
Question 4
assertion?
What if the auditor believes, on the basis of his additional audit procedures conducted to
(a) Perform additional audit procedures to identify events/ conditions beyond 12 months from the
conclude that the entity is not a Going Concern, but the management is not accepting the same?
date of financial statements
What course of action the auditor needs to undertake?
(b) Whether the events constitute a material uncertainty
Answer 4
(c) The adequacy of related discloses in the financial statements
If management has prepared financial statements using the Going Concern assertion to which
auditor differs as according to his judgement, the Going Concern assertion by the management is not (d) The implications for the auditor’s report
appropriate, then the auditor is required to express an adverse opinion. Ans: (a)
Question 5 4. Written Representation need to be mandatorily obtained from:

What kind of written representation does the auditor need to obtain in case of the scenario (a) Audit Committee
covered in Q3 above? (b) Client relationship Managers
Answer 5 (c) Company Secretary
The auditor needs to obtain written representation from management and where appropriate, those (d) CFO
charged with governance, regarding their plans for future action and the feasibility of these plans.
Ans: (d)

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5. Which of the following is not main pillar of written representants? 1. What should be the appropriate date of signing of thneed audit report?
(a) The management responsibility for preparation of financial statement (a) 20.07.2023
(b) Assertion related to completeness (b) Anytime between 15.07.2023 & 18.07.2023
(c) Assertion related to access to data and information (c) On or after 25.07.2023
(d) Written representation provides sufficient appropriate audit evidence (d) Anytime between 15.07.2023 & 25.07.2023
Ans: (d) Ans: (c)
Case Scenario 1 2. CA Sneha would have taken into account a lot of procedures to get knowledge of the events
occurring after the balance sheet date up to the date of the audit report relating to the company.
CA Sneha, a partner in M/s J & Associates, is carrying out a statutory audit of M/s ABC Stores
Which of the following does not fall under such audit procedures as per SA 560?
Ltd. for the Financial Year 2022-23, and she is ready to sign her audit report on 01.07.2023.
There are some written representations which are pending with the management of the company (a) Obtaining an understanding of the management’s procedures set up to identify subsequent events.
pertaining to such an audit, and she sent Deepak (her articled trainee), who is also a member of (b) Inquiring of the management w.r.t the occurrence of any such subsequent events.
the engagement team, to the company’s office for collection of the same.
(c) Reading the minutes of the meetings of the board held after the balance sheet date during this
On returning back, Deepak tells CA Sneha that major stocks of the company got destroyed period.
because of a fire in their plant on 27.06.2023, and it has affected the company’s operations badly.
(d) Getting the Interim financial statements prepared till the date of the audit report mandatorily as a
However, the business operations are likely to be resumed by management at an alternate place.
condition to issue the audit report
CA Sneha postponed the issuance of the audit report to consider the impact of such an event on
Ans: (d)
the financial state of affairs of the company. She wants the management to disclose the impact
of this unfortunate event in financial statements for the year 2022-23, to which management is
disinclined. After the management’s refusal, she issued her audit report on 15.07.2023. 3. W.r.t the first audit report dated 15.07.2023, which type of opinion was most likely provided
The management of the company seeks an appointment from CA Sneha to discuss an important by her?
matter on 20.07.2023. They informed her that the company had lost a lawsuit filed against it (a) Modified opinion
by one of the creditors on 18.07.2023 in a fast-track court, and now the company has to pay the
(b) Unqualified opinion
plaintiff a huge amount of ₹2 crores. The events causing this lawsuit arose after 31.03.2023.
(c) Disclaimer of opinion
CA Sneha is a bit perplexed, and her first question to the people from management visiting her
office was whether audited financial statements have been made available to any third parties (d) Including a statement in Emphasis of Matter/Other matters para.
or filed with the regulator. The management responded negatively. Ans: (a)
Now, CA Sneha wants them to amend the financial statements to include the impact of this
lawsuit on the financial affairs of the company. This time, they agreed and amended the
4. W.r.t the new audit report issued, which type of opinion is most appropriate?
financial statements accordingly to cover the impact of both the events – that of the fire in the
plant and losing the lawsuit, but they requested CA Sneha to issue a new audit report against (a) Disclaimer of opinion
the earlier one dated 15.7.2023. The management amends the financial statements, which are (b) Unqualified opinion
finally approved on 25.7.2023. CA Sneha issues a new audit report. (c) Adverse opinion
Considering the above situation, answer the following questions: - (d) Unqualified opinion and a statement in Emphasis of Matter/Other matters para.
Ans: (d)

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5. The fire event occurring on 27.6.2023 itnhe company’s plant requires the following action on (iv) Analyzing the cashflow forecast of the company.
part of management-: (v) Considering the additional facts or information available since the date of management’s
(a) Disclosure in notes to accounts assessment
(b) Adjustment in financial statements (vi) Make appropriate disclosures in the financial statements in connection with going concerns.
(c) Waiting for the insurance company to settle the claim (vii) Requesting Written Representation from management regarding the plans of future actions
(d) Preparing financial statements afresh and the feasibility of these plans.
Ans: (a) (viii) Writing a para addressed to the stakeholders in the audit report citing the results of
procedures adhered to relating to the going concern assumption.
Keeping in view above, answer the following questions: -
Case Scenario 2
1. CA Namit tells Manpreet about the auditor’s responsibilities in the above case on the matter
CA Namit, a partner in M/s J & Associates, is carrying out a statutory audit of M/s XYZ Gears under discussion. Which of the following doesn’t fall under auditor’s responsibilities?
Ltd. for the Financial Year 2022-23 and is in the process of issuing an audit report. His articled
(a) Obtaining sufficient and appropriate audit evidence on the matter under discussion.
trainee, Manpreet, is very curious about knowing the various facts relating to the consideration
of Standards on Auditing while carrying out an audit and issuing the audit report. (b) Conclude on the appropriateness of the management’s use of going concern.
She asks CA Namit about the relevance of the Going concern assumption in their audit and (c) Assessing whether a material uncertainty exists about the company’s ability to continue as a going
further reporting to which CA Namit explains to her that both parties have got their own concern.
responsibilities w.r.t this accounting assumption. The management of the company has its own (d) Guarantee the company’s ability to continue as a going concern based upon his audit procedures.
set of responsibilities while reporting upon the same is a very strict and sensitive matter for the
Ans: (d)
auditor as per the requirement of the relevant standard on auditing.
He tells Manpreet to prepare a list of procedures as she thinks that an auditor should carry out
when he identifies that the company is facing a downfall in business never seen before due to 2. Identify which set of audit procedures are relevant in the above case scenario as per the list
newer technology in the market and other competitors having sprung up swiftly adopting new prepared by Manpreet.
technology. (a) (I), (II), (IV), (V) & (VII)
He finds that this condition may cast significant doubt on the company’s ability to continue as (b) (I), (III) & (V)
a going concern.
(c) (II), (IV), (VI), (VII) & (VIII).
Manpreet thinks and researches and hands over a list of audit procedures to CA Namit for a
(d) (I), (II), (III), (IV) & (V).
final discussion.
Ans: (a)
CA Namit clarifies accordingly. CA Namit concludes that the use of a going concern basis of
accounting is appropriate in this company’s case, but a material uncertainty exists as to the
future prospects of the current business. However, the management has made an appropriate 3. CA Namit’s conclusion in the above case will lead him to give which type of audit opinion
disclosure w.r.t such material uncertainty in the financial statements. from the following?
Manpreet’s list of audit procedures includes: - (I) Modified opinion
(i) Requesting management to make its assessment relating to the company’s ability to (II) Unmodified opinion.
continue as a going concern.
(III) A separate section “Material uncertainty wrt Going concern” in his audit report.
(ii) Evaluating management’s plan of future actions.
(a) (I) only
(iii) Make a specific assessment of the company’s ability to continue as a going concern.
(b) (II) only

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(c) I) & (III)

(d) (II) & (III)
Ans: (d)
4. Consider the following statements: -

Statement I: - The Management is under a responsibility to make specific assessment of the
company’s ability to continue as a going concern.
Statement I: I -. The Management is under a responsibility to make appropriate disclosures in
connection with going concern in the financial statements.
(a) Statement I is correct only.
(b) Statement II is correct only as Statement I falls under the auditor’s responsibilities.
(c) Both statements are correct.
(d) Both statements are incorrect.
Ans: (c)
5. Which of the following is most appropriate regarding “going concern” assumption?

(a) It signifies that company is reflecting net losses in its financial statements.
(b) It signifies that company is not modernizing its plant and machinery.
(c) It signifies that company has no intention of curtailing materially the scale of its operations in
foreseeable future.
(d) It signifies that assets are likely to be recorded at the prices they would fetch.
Ans: (c)

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CA Harshad Jaju
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7
CHAPTER
REPORTING
Forming an Opinion and Reporting on Financial Statements
Question 1
“What constitutes a ‘true and fair view’ is the matter of an auditor’s judgement in particular
circumstances of a case.” Do you agree? Enlist the requirements you as an auditor will observe
to ensure true and fair view. (MTP 5 Marks Sep 22)
Answer 1
Significance of True and Fair: SA 700 “Forming an Opinion and Reporting on Financial Statements”,
requires the auditor to form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained; and express clearly that opinion through a written
report that also describes the basis for the opinion. The auditor is required to express his opinion on
the financial statements that it gives a true and fair view in conformity with the accounting principles
generally accepted in India (a) in the case of the Balance Sheet, of the state of affairs of the Company
as at March 31, 20XX; (b) in the case of the Statement of Profit and Loss, of the profit/ loss for the
year ended on that date; and (c) in the case of the Cash Flow Statement, of the cash flows for the year
ended on that date.
In the context of audit of a company, the accounts of a company shall be deemed as not disclosing
a true and fair view, if they do not disclose any matters which are required to be disclosed by virtue
of provisions of Schedule III to that Act, or by virtue of a notification or an order of the Central
Government modifying the disclosure requirements. Therefore, the auditor will have to see that the
accounts are drawn up in conformity with the provisions of Schedule III of the Companies Act,
2013 and whether they contain all the matters required to be disclosed therein. In case of companies
which are governed by special Acts, the auditor should see whether the disclosure requirements of the
governing Act are complied with.
It must be noted that the disclosure requirements laid down by the law are the minimum requirements.
If certain information is vital for presenting a true and fair view, the accounts should disclose it even
though there may not be a specific legal provision to do so. Thus, what constitutes a ‘true and fair’
view is the matter of an auditor’s judgment in the particular circumstances of a case. In more specific
terms, to ensure true and fair view, an auditor has to see:
(i) that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
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REPORTING REPORTING
(ii) no material asset is omitted; Question 3

(iii) the charge, if any, on assets are disclosed; KPI Ltd. is a company on which International Standards on Auditing are applicable along with
(iv) material liabilities should not be omitted; Standard on Auditing issued by the ICAI. The company appointed new auditors for the audit
of the financial statements year ended 31 March 2019 after doing all appointment formalities.
(v) the statement of profit and loss discloses all the matters required to be disclosed by Part II of Therefore, the auditor’s report referred the International Standard on Auditing in addition to
Schedule III the Standard on Auditing issued by the ICAI.
(vi) the balance sheet has been prepared in accordance with Part I of Schedule III; As an expert, you are required to advise the auditor regarding auditor’s report for audits
(vii) accounting policies have been followed consistently; and conducted in accordance with both the Standards. (RTP Nov 19)
(viii)all unusual, exceptional or non-recurring items have been disclosed separately. Answer 3
Auditor’s Report for Audits Conducted in Accordance with Both Standards on Auditing Issued by
ICAI and International Standards on Auditing or Auditing Standards of Any Other Jurisdiction: As per
Question 2
SA 700, “Forming an Opinion and Reporting on Financial Statements”, an auditor may be required
CA S has been appointed as Statutory Auditor of SRT Ltd. for the financial year 2022-2023. to conduct an audit in accordance with, in addition to the Standards on Auditing issued by ICAI, the
The Company while preparing financial statements for the year under audit prepared one International Standards on Auditing or auditing standards of any other jurisdiction. If this is the case,
additional profit and loss account that disclosed specific items of expenditure and included the the auditor’s report may refer to Standards on Auditing in addition to the International Standards on
same as an appendix to the financial statements. CA. S has not been able to understand this as Auditing or auditing standards of such other jurisdiction, but the auditor shall do so only if:
the additional profit and loss account is not covered under the applicable financial reporting
1) There is no conflict between the requirements in the ISAs or such auditing standards of other
framework. Guide him as to how he should deal with this issue while reporting on the financial
jurisdiction and those in SAs that would lead the auditor:
statements of SRT Ltd. (MTP 5 Marks Sep ’23, RTP May ’23)
(i) to form a different opinion, or
Answer 2
(ii)not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the particular
If supplementary information that is not required by the applicable financial reporting framework is
circumstances, is required by SAs; and
presented with the audited financial statements, the auditor shall evaluate whether, in the auditor’s
professional judgment, supplementary information is nevertheless an integral part of the financial 2) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report
statements due to its nature or how it is presented. When it is an integral part of the financial statements, Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording
the supplementary information shall be covered by the auditor’s opinion. specified by the Standards on Auditing. However, reference to “law or regulation” in above
paragraph shall be read as reference to the Standards on Auditing. The auditor’s report shall thereby
identify such Standards on Auditing.
not considered an integral part of the audited financial statements, the auditor shall evaluate whether
such supplementary information is presented in a way that sufficiently and clearly differentiates it When the auditor’s report refers to both the ISAs or the auditing standards of a specific jurisdiction
from the audited financial statements. If this is not the case, then the auditor shall ask management to and the Standards on Auditing issued by ICAI, the auditor’s report shall clearly identify the same
change how the unaudited supplementary information is presented. including the jurisdiction of origin of the other auditing standards
If management refuses to do so, the auditor shall identify the unaudited supplementary information
and explain in the auditor’s report that such supplementary information has not been audited. Question 4
When an additional profit and loss account that discloses specific items of expenditure is disclosed How should auditor give description of auditor’s responsibilities for the audit of the financial
as a separate schedule, included as an appendix to the financial statements, the auditor may consider statements when the auditor disclaims an opinion on the financial statements? .(RTP Nov’22)
this to be supplementary information that can be clearly differentiated from the financial statements.
Answer 4
Thus, additional profit and loss account is not considered an integral part of the audited financial
statements and the auditor shall evaluate that supplementary information is presented in a way that When the auditor disclaims an opinion on the financial statements due to an inability to obtain sufficient
sufficiently and clearly differentiates it from the audited financial statements. appropriate audit evidence, the auditor shall amend the description of the auditor’s responsibilities

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required by SA 700, “Forming an Opinion and Reporting on Financial Statements”, to include only not considered an integral part of the audited financial statements, the auditor shall evaluate whether
the following: such supplementary information is presented in a way that sufficiently and clearly differentiates it
(i) A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial from the audited financial statements. If this is not the case, then the auditor shall ask management to
statements in accordance with Standards on Auditing and to issue an auditor’s report; change how the unaudited supplementary information is presented. If management refuses to do so,
the auditor shall identify the unaudited supplementary information and explain in the auditor’s report
(ii) A statement that, however, because of the matter(s) described in the Basis for Disclaimer of
that such supplementary information has not been audited.
Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and The auditor’s evaluation of whether unaudited supplementary information is presented in a manner
that could be construed as being covered by the auditor’s opinion includes, for example, where
(iii) The statement about auditor independence and other ethical responsibilities required in SA 700.
that information is presented in relation to the financial statements and any audited supplementary
information and whether it is clearly labelled as “unaudited.”
Question 5 In the current case, the Statement of Average Revenue Per Booking (ARPB) and Comparative is
unaudited supplementary information that could be construed as being covered by the auditor’s
XYZ Limited involved in the hospitality business, appointed Charan & Karan Associates as their
opinion. Hence, the audit team should evaluate whether such supplementary information is presented
statutory auditor for FY 2022-23. Management of XYZ Limited, while drawing up the financial
in a way that sufficiently and clearly differentiates it from the audited financial statements.
statement for the said period, decided to add the following statement after the Statement of
Cash Flow as supplementary information to be presented with financial statements. No specific If not, then audit can suggest management to change the presentation of unaudited supplementary
mentions or labels were added to this statement to present that this is supplementary information. information by:
Statement of Average Revenue Per Booking (ARPB) and Comparative (in ` or otherwise stated) - Removing any cross-references from the financial statements to unaudited supplementary schedules
or unaudited notes so that the demarcation between the audited and unaudited information is
Total Bookings during FY sufficiently clear.
- FY 2021-22 36500 - Placing the unaudited supplementary information outside of the financial statements or, if that is
- FY 2022-23 39000 not possible in the circumstances, at a minimum placing the unaudited notes together at the end of
Average Revenue per Booking the required notes to the financial statements and clearly labelling them as unaudited.
- FY 2021-22 (Refer Note 28 Revenue from Operations) 3500 Unaudited notes that are intermingled with audited notes can be misinterpreted as being audited.
- FY 2022-23 (Refer Note 28 Revenue from Operations) 4200 If the management of XYZ Limited refuses to do so, the auditor shall identify the unaudited
Bookings Ratio (Organic source by Inorganic source) supplementary information, i.e., Statement of ARPB and Comparative and explain in the auditor’s
report that such supplementary information has not been audited.
- FY 2021-22 1:2
- FY 2022-23 1:1.65
Kindly guide the audit team regarding the requirement of SA 700 with respect to the Question 6
Supplementary Information Presented with the Financial Statements. (RTP Nov ’23) The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a
Answer 5 limitation on the scope of the audit) may arise from:
As per SA 700 “Forming an Opinion and Reporting on Financial Statements”, if supplementary (i) Circumstances beyond the control of the entity;
information that is not required by the applicable financial reporting framework is presented with the (ii) Circumstances relating to the nature or timing of the auditor’s work; or
audited financial statements, the auditor shall evaluate whether, in the auditor’s professional judgment,
(iii) Limitations imposed by management.
supplementary information is nevertheless an integral part of the financial statements due to its nature
or how it is presented. When it is an integral part of the financial statements, the supplementary Explain with the help of examples (RTP May 20)
information shall be covered by the auditor’s opinion.
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Answer 6 explanation. If the liability is provided in the books of accounts, entire reserves will be wiped off.
The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation Auditor seeks your guidance as to how this disclosure affects them while forming an opinion on
on the scope of the audit) may arise from: financial statements. (PYP 5 Marks July 21)
(i) Circumstances beyond the control of the entity; Answer 7
(ii) Circumstances relating to the nature or timing of the auditor’s work; or Forming an opinion and reporting on financial statements –
(iii) Limitations imposed by management. As per Ind AS 37, “Provisions, Contingent Liabilities and Contingent Assets”, an entity should disclose
for each class of contingent liability at the end of the reporting period a brief description of the nature
An inability to perform a specific procedure does not constitute a limitation on the scope of the audit if
of the contingent liability and, where practicable .
the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures.
(a) an estimate of its financial effect, measured in the standard;
Limitations imposed by management may have other implications for the audit, such as for the
auditor’s assessment of fraud risks and consideration of engagement continuance. (b) an indication of the uncertainties relating to the amount or timing of any outflow; and
Examples of circumstances beyond the control of the entity include when: (c) the possibility of any reimbursement.
• The entity is required to use the equity method of accounting for an associated entity, and the auditor SA – 700 - Forming an opinion and reporting on financial statements:
is unable to obtain sufficient appropriate audit evidence about the latter’s financial information to The auditor shall evaluate whether in view of the requirements of the applicable financial reporting
evaluate whether the equity method has been appropriately applied. framework –
• The timing of the auditor’s appointment is such that the auditor is unable to observe the counting (i) The financial statements adequately disclose the significant accounting policies selected and
of the physical inventories. applied;
• The auditor determines that performing substantive procedures alone is not sufficient, but the (ii) The accounting policies selected and applied are consistent with the applicable financial reporting
entity’s controls are not effective. framework and are appropriate;
Examples of an inability to obtain sufficient appropriate audit evidence arising from a limitation on (iii) The accounting estimates made by the management are reasonable;
the scope of the audit imposed by management include when: (iv) The information presented in the financial statements is relevant, reliable, comparable and
• Management prevents the auditor from observing the counting of the physical inventory. understandable;
• Management prevents the auditor from requesting external confirmation of specific account (v) The financial statements provide adequate disclosures to enable the intended users to understand
balances. the effect of material transactions and events on the information conveyed in the financial
statements.
If financial statements prepared in accordance with the requirements of a fair presentation framework
Question 7
do not achieve fair presentation, the auditor shall discuss the matter with management and, depending
MN & Associates, Chartered Accountants have been appointed as statutory Auditors of Cotton on the requirements of the applicable financial reporting framework and how the matter is resolved,
Ltd. for the F.Y 2020-2021. The Company is into the business of yarn manufacturing. For this shall determine whether it is necessary to modify the opinion in the auditor’s report in accordance
purpose, cotton ginning is also done within the factory premises. Raw cotton is purchased from with SA 705. In the present case, auditor may consider modifying his opinion considering the financial
local market and processed in-house. The Company received a notice from the State Government effect of liability not disclosed properly.
to deposit market development fee for the last 5 years to the tune of ` 10.00 crores. The Company
and all other organizations in the same business have not deposited the market development
fee, taking shelter of an old circular issued by the Government. The trade association met with
the government officials to resolve the matter and agreed to deposit the same prospectively.
However, the matter relating to payment of development fee for the last 5 years is pending
before the Government as at the end of the financial year. The Company, however, disclosed
the same in notes to accounts, as contingent liability, without quantifying the effect and proper
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Multiple Choice Questions (MCQ) (a) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion.
Question 1
(b) If the auditor concludes that the possible effects on the financial statements of undetected
AHKPL Ltd. is an unlisted company in the business of the real estate following Accounting
misstatements, if any, could be both material and pervasive so that a qualification of the opinion
Standards. The company recognizes revenue on the basis of percentage completion as per AS 7.
would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from
The company has various residential and commercial projects at different locations for which
the audit, where practicable and possible under applicable law or regulation.
separate profitability statements are prepared by the management. Profitability statements are
based on estimated costs of the projects. While reviewing the profitability statements, statutory (c) If the auditor concludes that the possible effects on the financial statements of undetected
auditors observed that the profitability of the projects have been fluctuating significantly year misstatements, if any, could be both material and pervasive so that a qualification of the opinion
on year and the prime reason for that is the change in the estimated costs. As per the auditors, would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from
frequent changes are made by the management in the estimated costs to increase the percentage the audit, where practicable and possible under applicable law or regulation. If withdrawal from
completion and through which revenue and profit numbers are manipulated. The auditors are the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on
not satisfied with the profitability statements of two major projects which account for 50% of the financial statements.
the total turnover of the company. (d) If the auditor concludes that the possible effects on the financial statements of undetected
Management tried to explain the auditors saying that the changes would happen because of misstatements, if any, could be both material and pervasive so that a qualification of the opinion
the dynamics of the industry which have been changing significantly and are unfavorable to would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from
the industry as a whole. All of this is leading to changes in the estimated costs. How should the the audit, where practicable and possible under applicable law or regulation. If withdrawal from
auditors deal with this matter? (MTP 2 Marks, April 19) the audit before issuing the auditor’s report is not practicable or possible, report the matter to the
Registrar of Companies.
(a) Management’s view seems reasonable. Estimated costs are only estimates which are subject to
changes and hence the auditors should drop this matter. Ans: (d)
(b) The auditors view seems reasonable and if the management does not agree, the auditors should
issue qualified report. Question 3
(c) The auditors should consider the impact of the adjustment on the financial statements and if the BDJ Ltd. is engaged in the business of providing management consultancy services and have
impact is pervasive, the auditor should issue adverse opinion. been in operation for the last 15 years. The company’s financial reporting process is very good
(d) The auditors should consider the impact of the adjustment on the financial statements and may and its statutory auditors always issued clean report on the audit of the financial statements of
take the adjustment to unadjusted entry in the management representation letter and basis that the company.
issue a clean report. The auditors were required to be rotated due to mandatory audit rotation requirement of the
Ans: (c) Companies Act 2013.
RNJ & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the
company for a term of 5 years and have to start their first audit for the financial year ended 31
Question 2
March 2019.
OPP & Co LLP is the statutory auditor of ABBA Private Limited. The company has an annual
The auditors had a detailed and clear discussion with the management that they will perform
turnover of INR 1000 crores and profits of INR 250 crores. The company is planning to get
their audit procedures in respect of opening balances along with the audit procedures for the
listed next year. The company appointed OPP & CO LLP as new auditors to have a fresh look
financial year ended 31 March 2019.
on their financial systems so that the financial reporting can be improved wherever required.
Management agreed with that and the audit was completed as per the plan.
During the course of audit, the auditors have been facing lot of challenges to obtain sufficient
appropriate audit evidence and have discussed the same with the management. Now the auditors The auditors did not have any significant observations and hence they communicated to the
are determining the implications. Please suggest which one of the following should not be the management that their report will be clean. Management was quite happy with this and also
implication in respect of this matter. (MTP 2 Marks, April 19) requested the auditors to share draft report before issuing the final report.

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In the draft audit report, all the particulars were fine except ‘other matters paragraph’ wherein c. Considering the matter is not relevant/ material to current period figures, the management may
the auditors gave a reference that the financial statements for the comparative year ended 31 include a note in the financial statements and basis that no reporting in respect of this matter would
March 2018 was audited by another auditor. Management asked the audit team to remove this be required in the auditors’ report for the year ended 31 March 2022.
paragraph as the auditors had performed all the audit procedures on opening balances also. But d. Include an emphasis of matter because of the effects or possible effects of the error in the auditors’
the auditors did not agree with the management. report for the year ended 31 March 2022. (MTP 1 Mark March ’23)
Please advise the auditor or the management whoever is incorrect with the right guidance. Ans: (b)
(a) The contention of the management is valid. After performing all the audit procedures, an auditor
should not pass on the responsibility to another auditor by including such references in his audit
report. Question 5
(b) Any auditor has two options, either to perform audit procedures on opening balances or given While verifying the salary expense of employees, the auditor has been asked to rely on the
such reference of another auditor in his report. An auditor can not mix up the things like this values as per SAP software and some hard copy reports and documents as the HRMS package
auditor has done. It is completely unprofessional. (source software) has become corrupt during the year and the management is not having any
data backup.
(c) In the given situation even if the auditor wants to give such reference, the management and the
auditor should have taken approval from the previous auditor at the time of appointment of new How should the auditor deal with this issue?
auditor. In this case, it cannot be done. (a) The auditor should issue a disclaimer of opinion as records are destroyed and he is unable to
(d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor obtain sufficient appropriate audit evidence.
is required to include such reference in his report as per the requirements of the auditing standard. (b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit
(RTP Nov 19) evidence before disclaiming the opinion.
Ans: (d). (c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls.
(d) The auditor can rely on the SAP data and there is no need for qualification of report. (MTP 1
Question 4 Marks, April 21)
Shripal Ltd is in the business of manufacturing of tiles and sanitaryware. The company has a Ans: (b)
large inventory every year. Annual turnover of the company is INR 3600 crore. The company
has 9 plants across India. The management of the company carries out physical verification of
Question 6
inventory every year at the time of reporting date. During the year ended 31 March 2022, it was
found by the management that the inventory sheets of 31 March 2021 did not include five pages CA Kamal is the statutory auditor of Autocover Ltd. for the FY 2020 -21. The company is engaged
containing details of inventory worth INR 29.5 crore. Management has included this inventory in in the business of manufacture of car accessories. CA Kamal noticed that the inventories of the
the valuation of inventory as of 31 March 2022. Management has also explained that considering company amounting to Rs. 46 crores (equal to 25% of the total assets of the company) at the end
the size of the company this may happen at times as the inventory is huge and lying at various of the year do not exist. Also, sales amounting to Rs. 33 crores (equal to 10% of the total sales
locations. Moreover, the amount of the inventory is insignificant if considered as a percentage of during the year) have not actually occurred. CA Kamal noticed both the material discrepancies
revenue or inventory. State how you will deal with this matter as an auditor in the accounts of the just before the finalisation of the audit report for the year ending 31.03.2021. CA. Kamal considers
company (towards substantive audit procedures and excluding the impact on auditor’s assessment that the above misstatement would distort the true and fair view to a greater extent.
under Internal Financial Control Framework) for the year ended 31 March 2022. What is correct course of action that CA Kamal should consider in such a situation?
a. Since the matter is not relevant/ material to current period figures, no reporting in respect of this (a) CA Kamal should consider withdrawing from the audit engagement or issuing a disclaimer of
matter would be required in the auditors’ report for the year ended 31 March 2022. opinion for the FY 2020-21.
b. Management should restate the financials to adjust the error. Otherwise, auditor may modify his (b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
opinion on current year’s financial statements considering the materiality. discrepancies in the basis for adverse opinion paragraph of the auditor’s report.

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(c) CA Kamal should ask the management to explain both the discrepancies in the notes to accounts The management of the company carries out physical verification of inventory every year at the
and he himself should highlight the matter in the Key Audit matter paragraph of the auditor’s time of reporting date. During the year ended 31 March 2018, it was found by the management
report. that the inventory sheets of 31 March 2017 did not include five pages containing details of
(d) CA Kamal should give a qualified opinion along with the specific mention of the matters in the inventory worth INR 24.5 crores. Management has included this inventory in the valuation
Emphasis of matter paragraph in the auditor’s report along with appropriate disclosure in the of inventory as of 31 March 2018. Management has also explained that considering the size of
notes to accounts to be made by the management of Auto cover Ltd. (MTP 1 Marks, March 21) the company this may happen at times as the inventory is huge and lying at various locations.
Morever, the amount of the inventory is insignificant if considered as a percentage of revenue or
Ans: (a). inventory. State how you will deal with this matter as an auditor in the accounts of the company
(towards substantive audit procedures and excluding the impact on auditor’s assessment under
Internal Financial Control Framework) for the year ended 31 March 2018.
Question 7
(a) Since the matter is not relevant/ material to current period figures, no reporting in respect of this
Preparing the financial statements in accordance with the applicable financial reporting
matter would be required in the auditors report for the year ended 31 March 2018.
framework is the responsibility of the management of ABC Ltd. Which of the following is correct
in regard to the disclosure of such management responsibility? (b) Management should restate the financials to adjust the error. Otherwise auditor may modify his
opinion on current year’s financial statements considering the materiality.
(a) This is implied responsibility of management and is presumed in an audit of financial statements
and therefore need not be specifically mentioned anywhere. (c) Considering the matter is not relevant/ material to current period figures, the management may
include a note in the financial statements and basis that no reporting in respect of this matter
(b) The management may undertake to accept such responsibility through an engagement letter itself.
would be required in the auditors report for the year ended 31 March 2018.
(c) The auditor’s report should describe the management responsibility in a section with heading
(d) Include an emphasis of matter because of the effects or possible effects of the error in the auditors
“responsibility of management for financial statements”.
report for the year ended 31 March 2018. (RTP May 19)
(d) The auditor’s report should refer to the responsibility of auditors and not that of the management
Ans: (b).
as the same is obvious. (MTP 1 Marks, March 21)
Ans: (c)
Question 10
ADI Ltd. is engaged in the business of providing management consultancy services and have
Question 8
been in operation for the last 15 years. The company’s financial reporting process is very good
In case of audits of unlisted corporate entities, other information section is required in auditor’s and its statutory auditors always issued clean report on the audit of the financial statements
report when at the date of auditor’s report: of the company. The auditors were required to be rotated due to mandatory audit rotation
(a) Auditor has obtained some or all of the other information. requirement of the Companies Act 2013.
(b) Auditor has obtained all of the other information. RNJ & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the
(c) Auditor has obtained or expects to obtain the other information. company for a term of 5 years and have to start their first audit for the financial year ended 31
March 2022.
(d) Auditor has obtained some of the other information. (MTP 1 Mark April ’23)
The auditors had a detailed and clear discussion with the management that they will perform
Ans: (a) their audit procedures in respect of opening balances along with the audit procedures for the
financial year ended 31 March 2022.
Question 9 Management agreed with that and the audit was completed as per the plan.
KJA Ltd is in the business of manufacturing of tiles and sanitaryware. The company has a large The auditors did not have any significant observations and hence they communicated to the
inventory every year. Annual turnover of the company is INR 3000 crores. The company has 7 management that their report will be clean. Management was quite happy with this and also
plants across India. requested the auditors to share draft report before issuing the final report.
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In the draft audit report, all the particulars were fine except ‘ other matters paragraph’ wherein SA 701 Communicating Key Audit Matters in the
the auditors gave a reference that the financial statements for the comparative year ended 31
Independent Auditor’s Report
March 2021 was audited by another auditor. Management asked the audit team to remove this
paragraph as the auditors had performed all the audit procedures on opening balances also. But
the auditors did not agree with the management. Question 1
Please advise the auditor or the management whoever is incorrect with the right guidance. AKY Ltd. is a listed company engaged in the business of software and is one of the largest
a) The contention of the management is valid. After performing all the audit procedures, an auditor company operating in this sector in India. The company’s annual turnover is Rs. 40,000 crores
should not pass on the responsibility to another auditor by including such references in his audit with profits of Rs. 5,000 crores. Due to the nature of the business and the size of the company,
report. the operations of the company are spread out in India as well as outside India. The company’s
contracts with its various customers are quite complicated and different. During the course of
b) Any auditor has two options, either to perform audit procedures on opening balances or given
the audit, the audit team spends significant time on audit of revenue – be it planning, execution
such reference of another auditor in his report. An auditor can not mix up the things like this
or conclusion. This matter was also discussed with management at various stages of audit. The
auditor has done. It is completely unprofessional.
efforts towards audit of revenue also involve significant involvement of senior members of the
c) In the given situation even if the auditor wants to give such reference, the management and the audit team including the audit partner. After completion of audit for the year ended 31 March
auditor should have taken approval from the previous auditor at the time of appointment of new 2019, the audit partner was discussing significant matters with the management wherein they
auditor. In this case, it cannot be done. also communicated to the management that he plans to include revenue recognition as key audit
d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor matter in his audit report. The management did not agree with revenue recognition to be shown
is required to include such reference in his report as per the requirements of the auditing standard. as key audit matter in the audit report. Comment (MTP 4 Marks, Oct 19)
(MTP 1 Mark Sep ‘22) Answer 1
Ans: (d) Determining Key Audit Matters: SA 701, “Communicating Key Audit Matters in the Independent
Auditor’s Report”, deals with the auditor’s responsibility to communicate key audit matters in the
auditor’s report. It is intended to address both the auditor’s judgment as to what to communicate in
the auditor’s report and the form and content of such communication.
The auditor shall determine, from the matters communicated with those charged with governance,
those matters that required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following:
a. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance
with SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment.
b. Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high
estimation uncertainty.
c. The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters determined in accordance with above were of most
significance in the audit of the financial statements of the current period and therefore are the key
audit matters. In the instant case, AKY Ltd., a listed company engaged in the business of software
and its contracts with its various customers are also quite complicated and different. Further, the audit
team spends significant time on audit of revenue and efforts towards audit of revenue also involve

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significant involvement of senior members of the audit team including audit partner during audit. This & Co. decided to provide an adverse opinion for the same and further determined that, there
matter was also discussed with management at various stages. After completion of audit, the audit are no key audit matters other than the matter to be described in the Basis for Adverse Opinion
partner communicated the management regarding inclusion of paragraph on revenue recognition as section. Comment whether XYZ & Co. needs to report under SA 701 ‘Communicating Key
key audit matter in his audit report. Audit Matters in the Independent Auditor’s Report’? (MTP 5 Marks Sep 22)
In view of SA 701, the assessment of the auditor is valid as above matter qualifies to be a key audit Answer 3
matter in the opinion of auditor. Hence, it should be reported accordingly by the auditor in his audit 1. SA 700 establishes requirements and provides guidance on forming an opinion on the financial
report. statements. Communicating key audit matters is not a substitute for disclosures in the financial
statements that the applicable financial reporting framework requires management to make, or
that are otherwise necessary to achieve fair presentation. SA 705, “Modifications to the Opinion in
Question 2
the Independent Auditor’s Report”, addresses circumstances in which the auditor concludes that
“The auditor shall determine, from the matters communicated with those charged with there is a material misstatement relating to the appropriateness or adequacy of disclosures in the
governance, those matters that required significant auditor attention in performing the audit. financial statements.
In making this determination, the auditor shall take into account the key factors”. You are
2. When the auditor expresses a qualified or adverse opinion in accordance with SA 705, presenting
required to define key audit matters and briefly discuss the factors determining the key audit
the description of a matter giving rise to a modified opinion in the Basis for Qualified (Adverse)
matters. (MTP 4 Marks, April 18)
Opinion section helps to promote intended users’ understanding and to identify such circumstances
Answer 2 when they occur. Separating the communication of this matter from other key audit matters
Definition of Key Audit Matters: SA 701 “Communicating Key Audit Matters in the Independent described in the Key Audit Matters section, therefore, gives it the appropriate prominence in the
Auditor’s Report”, define Key audit matters as matters that, in the auditor’s professional judgment, auditor’s report.
were of most significance in the audit of the financial statements of the current period. Key audit matters 3. Further, when the auditor expresses a qualified or adverse opinion, communicating other key
are selected from matters communicated with those charged with governance. Factors determining audit matters would still be relevant to enhancing intended users’ understanding of the audit, and
Key Audit Matters: As per SA 701 the auditor shall determine, from the matters communicated with therefore the requirements to determine key audit matters apply. However, as an adverse opinion
those charged with governance, those matters that required significant auditor attention in performing is expressed in circumstances when the auditor has concluded that misstatements, individually
the audit. In making this determination, the auditor shall take into account the following: or in the aggregate, are both material and pervasive to the financial statements depending on the
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance significance of the matter(s) giving rise to an adverse opinion, the auditor may determine that no
with SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding other matters are key audit matters.
the Entity and Its Environment. 4. In the given situation Moksh Ltd., a listed company, has not consolidated one of its subsidiary.
(ii) Significant auditor judgments relating to areas in the financial statements that involved significant Further, Consolidated Financial Statements of Moksh Ltd. Are materially misstated due to such
management judgment, including accounting estimates that have been identified as having high nonconsolidation.
estimation uncertainty. The material misstatement is also deemed to be material and pervasive and effect of the failure
(iii) The effect on the audit of significant events or transactions that occurred during the period. to consolidate have not been determined. In the given situation it is appropriate to give Adverse
Opinion by XYZ & Co., a Chartered Accountant Firm.
5. Since, in the given case, Adverse Opinion is being expressed thus XYZ & Co. can communicate
Question 3
Key Audit Matter in given below manner:
While auditing the complete set of consolidated financial statements of Moksh Ltd., a listed
6. Key Audit Matters: Except for the matter described in the Basis for Adverse Opinion section, we
company, using a fair presentation framework, XYZ & Co., a Chartered Accountant firm,
have determined that there are no other key audit matters to communicate in our report.
discovered that the consolidated financial statements are materially misstated due to the non-
consolidation of one of the subsidiary. The material misstatement is deemed to be pervasive
to the consolidated financial statements. The effects of the misstatement on the consolidated
financial statements could not be determined because it was not practicable to do so. Thus, XYZ
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Question 4 Mr. Vishay considered the significance of such matter but however he was of the opinion that
Write a short note on: Key Audit Matters and Circumstances in Which a Matter Determined to such a matter did not appear to link with the matters disclosed in the financial statements and
Be a Key Audit Matter Is Not Communicated in the Auditor’s Report. (RTP May 18) so there was no need to disclose such matter as a key audit matter.
Answer 4 Whether the contention of Mr. Vishay is proper with respect to the matters to be communicated
as a key audit matter? (RTP Nov ’21)
Key Audit Matters— As per SA 701, “Communicating Key Audit Matters in the Independent
Auditor’s Report (New)”, those matters that, in the auditor’s professional judgment, were of most Answer 6
significance in the audit of the financial statements of the current period. Key audit matters are selected As per SA 701, ‘Communicating Key Audit Matters in the Independent Auditor’s Report’, the auditor
from matters communicated with those charged with governance. shall determine, from the matters communicated with those charged with governance, those matters
Circumstances in Which a Matter Determined to Be a Key Audit Matter Is Not Communicated in the that required significant auditor attention in performing the audit. In making this determination, the
Auditor’s Report: The auditor shall describe each key audit matter in the auditor’s report unless: auditor shall take into account the following:
(i) Law or regulation precludes public disclosure about the matter; or (i) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance
with SA 315.
(ii) In extremely rare circumstances, the auditor determines that the matter should not be communicated
in the auditor’s report because the adverse consequences of doing so would reasonably be expected (ii) Significant auditor judgments relating to areas in the financial statements that involved significant
to outweigh the public interest benefits of such communication. This shall not apply if the entity management judgment, including accounting estimates that have been identified as having high
has publicly disclosed information about the matter. estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the aforesaid matters considered were of most significance in the
Question 5
audit of the financial statements of the current period and therefore are the key audit matters.
Write a short note on: The purpose of communicating key audit matters.(RTP Nov 18)
These aforesaid considerations focus on the nature of matters communicated with those charged with
Answer 5 governance. Such matters are often linked to matters disclosed in the financial statements and are intended
Purpose of Communicating Key Audit Matters : The purpose of communicating key audit matters is to reflect areas of the audit of the financial statements that may be of particular interest to intended users.
to enhance the communicative value of the auditor’s report by providing greater transparency about the The fact that these considerations are required is not intended to imply that matters related to them are
audit that was performed. Communicating key audit matters provides additional information to intended always key audit matters; rather, matters related to such specific considerations are key audit matters
users of the financial statements (“intended users”) to assist them in understanding those matters that, in only if they are determined to be of most significance in the audit.
the auditor’s professional judgment, were of most significance in the audit of the financial statements of
In addition to matters that relate to the specific required considerations, there may be other matters
the current period. Communicating key audit matters may also assist intended users in understanding the
communicated with those charged with governance that required significant auditor attention and that
entity and areas of significant management judgment in the audited financial statements.
therefore may be determined to be key audit matters. Such matters may include, for example, matters
relevant to the audit that was performed that may not be required to be disclosed in the financial
Question 6 statements. For example, the implementation of a new IT system (or significant changes to an existing
IT system) during the period may be an area of significant auditor attention, in particular if such a
Mr. Hemant Ramsey was appointed as the engagement partner for conducting the audit of
change had a significant effect on the auditor’s overall audit strategy or related to a significant risk
Kshetra Lap Ltd. for F.Y. 2020-21, on behalf of Ramsey & Associates. Mr. Vishay Tyagi was
(e.g., changes to a system affecting revenue recognition).
appointed as the engagement quality control reviewer by the firm for the said audit.
In the given case, there was implementation of ERP system in the company due to which some of
During F.Y. 2020-21, there was an implementation of ERP system in a phased manner, in
its business processes got automated and which had a significant effect on the auditor’s overall audit
Kshetra Lap Ltd. due to which some of its business processes got automated. As a result of the
strategy during the period.
implementation of such a system, there was a significant effect on the auditor’s overall audit
strategy. Mr. Hemant discussed the implementation of such a system with Mr. Vishay and also Accordingly, such a matter can be considered as a key audit matter if according to Mr. Hemant, such
told him that such a matter may be a key audit matter to be reported in the audit report. a matter required significant attention that had affected his overall audit strategy.

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Thus, the contention of Mr. Vishay is not proper as matters that do not link with the matters disclosed
Key audit matters— Emphasis of Matter paragraph –
in the financial statements can also be considered as a key audit matter if it required significant
attention of the auditor which had an impact on its audit. Those matters that, in the auditor’s professional A paragraph included in the auditor’s report that
judgment, were of most significance in the refers to a matter appropriately presented or
audit of the financial statements of the current disclosed in the financial statements that, in the
Question 7 period. Key audit matters are selected from auditor’s judgment, is of such importance that
What is the auditor’s responsibility to report a key audit matter for which there are no relevant matters communicated with those charged with it is fundamental to users’ understanding of the
disclosures in the financial statements? (RTP May 22) governance. [SA 701] financial statements. [SA 706]
Answer 7 Matters that are determined to be key audit A widespread use of Emphasis of Matter
matters in accordance with SA 701 may also be, paragraphs may diminish the effectiveness of the
When communicating key audit matters, the fact that there are no disclosures in the financial statements in the auditor’s judgment, fundamental to users’ auditor’s communication about such matters.
related to a matter determined to be a key audit matter does not relieve the auditor from the requirement understanding of the financial statements. In such
to communicate it. An auditor may determine a key audit matter related to the audit for which relevant Use of Emphasis of Matter paragraphs is not a
cases, in communicating the matter as a key audit
disclosure requirements do not exist in the applicable financial reporting framework. substitute for a description of individual key
matter in accordance with SA 701, the auditor
audit matters where SA 701 is applicable.
For example, the implementation of a new IT system (or significant changes to an existing IT system) may wish to highlight or draw further attention
during the period may be an area of significant auditor attention, in particular, if such a change had a to its relative importance. There may be a matter that is not determined to
significant effect on the auditor’s overall audit strategy or related to significant risk (e.g., changes to a be a key audit matter in accordance with SA 701
Communicating key audit matters provides
system affecting revenue recognition. (i.e., because it did not require significant auditor
additional information to intended users of
attention), but which, in the auditor’s judgment,
Also, if an auditor determines that it is necessary to include information about the entity in order to the financial statements to assist them in
is fundamental to users’ understanding of the
effectively describe a key audit matter that has not been disclosed by management and management understanding those matters that, in the auditor’s
financial statements (e.g., a subsequent event).
does not agree to disclose that information, the auditor should reconsider the adequacy of the disclosures professional judgment, were of most significance
in accordance with applicable financial reporting framework. The auditor should communicate the in the audit and may also assist them in If the auditor considers it necessary to draw
matter as a key audit matter unless law or regulation precludes public disclosure about the matter or understanding the entity and areas of significant users’ attention to such a matter, the matter is
in extremely rare circumstances, the auditor determines that the matter should not be communicated management judgment in the audited financial included in an Emphasis of Matter paragraph in
in the auditor’s report because the adverse consequences of doing so would reasonably be expected to statements. the auditor’s report in accordance with this SA.
outweigh the public interest benefits of such communication. The auditor may do so by presenting the matter
The communication of key audit matters in the
more prominently than other matters in the Key
auditor’s report may also provide intended users
Audit Matters section (e.g., as the first matter)
Question 8 a basis to further engage with management and
or by including additional information in the
How does the inclusion of Emphasis of Matter (EOM) paragraphs in the Auditor’s Report differ those charged with governance about certain
description of the key audit matter to indicate the
from the disclosure of Key Audit Matters (KAM)? (RTP Nov ’23) matters relating to the entity, the audited financial
importance of the matter to users’ understanding
statements, or the audit that was performed.
Answer 8 of the financial statements.
Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in the Auditor’s
Report

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Multiple Choice Questions (MCQs) shall report under ‘Key Audit Matters’ para the matter same as stated in ‘Adverse Opinion’ para
regarding non- consolidation of a subsidiary. (MTP 1 Marks, April 19)
Question 1
Ans: (c)
As per SA 701- Communicating Key audit matters in the Independent auditor’s Report, which
among the following areas should CA & Co. take into account to determine “Key Audit Matter”?
(i) The effect on audit of significant transactions that took place in the financial year. Question 3
(ii) Areas of high risk as assessed and reported by management’s expert. Descripton of each key audit matter in the “key audit matters section” needs to cover except
(iii) Significant auditor judgement relating to areas in the financials that involved significant following aspects:
management judgement. (a) Reference to related disclosures, if any, in the financial statements.
(a) (i) & (ii) (b) Explanation on the matter given by management.
(b) (ii) only (c) How the matter was addressed in the audit.
(c) (i) & (iii) (d) Why the matter was considered to be one of most significance in the audit and therefore determined
(d) (i), (ii) & (iii) (MTP 1 Mark April 22, RTP Nov’20) to be a key audit matter .(MTP 1 Mark Nov 21)
Ans: (c) Ans: (b)
While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed RBJ Ltd. is a listed company engaged in the business of software and is one of the largest
company, using a fair presentation framework, M/s Pintu & Co., a Chartered Accountant company operating in this sector in India. The company’s annual turnover is ` 40,000 crores
firm, discovered that the consolidated financial statements are materially misstated due to the with profits of ` 5,000 crores. Due to the nature of the business and the size of the company, the
non- consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the operations of the company are spread out in India as well as outside India.
consolidated financial statements. The effects of the misstatement on the consolidated financial Outside India, the company is focusing more on US and European markets and the company
statements have not been determined because it was not practicable to do so. Thus, M/s Pintu has been able to establish its good reputation in these markets as well.
& Co. decided to provide an adverse opinion for the same and further determined that, there
During the course of the audit, the audit team spends significant time on audit of revenue– be
are no key audit matters other than the matter to be described in the Basis for Adverse Opinion
it planning, execution or conclusion. The audit team for this engagement is generally very big
section. Comment whether M/s Pintu & Co. needs to report under SA 701 ‘Communicating Key
i.e. a team of approx. 70-80 members. The company’s contracts with its various customers are
Audit Matters in the Independent Auditor’s Report’?
quite complicated and different. The efforts towards audit of revenue also involve significant
(a) M/s Pintu & Co. have the option to follow SA 701, thus, need not to report any key audit matters. involvement of senior members of the audit team including the audit partner.
(b) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit After completion of audit for the year ended 31 March 2019, the audit partner was discussing
matters other than the matter to be described in the Basis for Adverse Opinion section, no ‘Key significant matters with the management wherein he also communicated to the management
Audit Matters’ para needs to be stated under audit report. that he plans to include revenue recognition as key audit matter in his audit report. The
(c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit management was quite surprised to understand this from the auditor and did not agree with
matters other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu revenue recognition to be shown as key audit matter in the audit report. As per the management,
& Co. shall state, under ‘Key Audit Matters’ para, that ‘except for the matter described in the the auditors didn’t have any modification and such a matter getting reported as key audit matter
Basis for Adverse Opinion section, we have determined that there are no other key audit matters would not go down well with various stakeholders and would significantly impact the financial
to communicate in our report.’ positions of the company in the market. The auditors were not able to convince the management
in respect of this point and there was a difference of opinion.
(d) M/s Pintu & Co. is under compulsion to follow SA 701 as the audit is of a listed company and

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You are requested to give your view in respect of this matter. SA 705 Modifications to the Opinion in the Independent Auditor’s Report
(a) The concern of the management is valid. For such a large sized company, such type of matter
getting reported as key audit matter is not appropriate.
Question 1
(b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter and hence
As an auditor of ABC Limited, in view of given circumstances, you are required to draft qualified
should be reported accordingly by the auditor in his audit report.
opinion and basis for qualified opinion due to the departure from the applicable Financial
(c) Reporting revenue as key audit matter when the auditor does not have observation in that area Reporting Framework:
leading to any modification in his report, would not be appropriate.
• Audit of a complete set of financial statements of an company other than a listed company
(d) This being the first year of reporting of key audit matters, the auditor should take a soft stand and (registered under the Companies Act, 2013) using a fair presentation framework.
should avoid reporting such controversial matters in his report.(RTP Nov 19)
• The financial statements are prepared by management of the entity in accordance with the
Ans: (b). Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210.
• A departure from the applicable financial reporting framework resulted in a qualified opinion.
• The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and
the provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570 (Revised).
• Between the date of the financial statements and the date of the auditor’s report, there was a
fire in the entity’s production facilities, which was disclosed by the entity as a subsequent event.
In the auditor’s judgment, the matter is of such importance that it is fundamental to users’
understanding of the financial statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current period.
• The auditor is not required, and has otherwise not decided, to communicate key audit matters
in accordance with SA 701.
• Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013. (MTP 5 Marks, Aug 18)
Answer 1
Qualified Opinion
We have audited the standalone financial statements of ABC Limited (“the Company”), which
comprise the balance sheet as at March 31, 20X1, 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

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statements, including a summary of significant accounting policies and other explanatory information • The consolidated financial statements are materially misstated due to the non-consolidation of
(in which are included the Returns for the year ended on that date audited by the branch auditors of a subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial
the Company’s branches located at (location of branches). statements. The effects of the misstatement on the consolidated financial statements have not
In our opinion and to the best of our information and according to the explanations given to us, except been determined because it was not practicable to do so (i.e., an adverse opinion is appropriate).
for the effects of the matter described in the Basis for Qualified Opinion section of our report, the • The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and
aforesaid financial statements present fairly, in all material respects, or give a true and fair view in the provisions of the Companies Act, 2013.
conformity with the accounting principles generally accepted in India of the state of affairs of the • Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
Company as at March 31st, 2XXX and profit/loss, (changes in equity) and its cash flows for the year does not exist related to events or conditions that may cast signif icant doubt on the entity’s
ended on that date. ability to continue as a going concern in accordance with SA 570 (Revised).
Basis for Qualified Opinion • SA 701 applies; however, the auditor has determined that there are no key audit matters
The Company’s short-term marketable securities are carried in the statement of financial position at other than the matter described in the Basis for Adverse Opinion section.
xxx. Management has not marked these securities to market but has instead stated them at cost, which • Those responsible for oversight of the consolidated financial statements differ from those
constitutes a departure from the Accounting Standards prescribed in section 133 of the Companies responsible for the preparation of the consolidated financial statements.
Act, 2013. The Company’s records indicate that had management marked the marketable securities
• In addition to the audit of the consolidated financial statements, the auditor has other
to market, the Company would have recognized an unrealized loss of Rs.xxx in the statement of
reporting responsibilities required under the Companies Act, 2013. (MTP 5 Marks, April 18)
comprehensive income for the year. The carrying amount of the securities in the statement of financial
position would have been reduced by the same amount at March 31, 20X1, and income tax, net income Answer 2
and shareholders’ equity would have been reduced by Rs.xxx, Rs.xxx and Rs.xxx, respectively. Adverse Opinion : We have audited the accompanying consolidated financial statements of XYZ
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under Company Limited (hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Company and its subsidiaries together referred to as “the Group”), its associates and jointly controlled
Statements section of our report. We are independent of the Company in accordance with the ethical entities, which comprise the consolidated balance sheet as at March 31, 2XXX, the consolidated
requirements that are relevant to our audit of the financial statements under the provisions of the statement of profit and Loss, (consolidated statement of changes in equity){where applicable} and the
Companies Act, 2013, and we have fulfilled our other ethical responsibilities in accordance with these consolidated statement of cash flows for the year then ended, and notes to the consolidated financial
requirements and the ICAI’s Code of Ethics. We believe that the audit evidence we have obtained is statements, including a summary of significant accounting policies (hereinafter referred to as the
sufficient and appropriate to provide a basis for our qualified opinion. “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
Question 2
accompanying consolidated financial statements do not give a true and fair view in conformity with
As an auditor of XYZ Limited, in view of given circumstances, you are required to draft Adverse the accounting principles generally accepted in India, of their consolidated state of affairs of the
Opinion and basis for adverse opinion due to a Material Misstatement of the Consolidated Group, its associates and jointly controlled entities, as at March 31, 20XX, of its consolidated profit/
Financial Statements. loss, (consolidated position of changes in equity) ){where applicable} and the consolidated cash flows
• Audit of a complete set of consolidated financial statements of a listed company (incorporated for the year then ended.
under the Companies Act, 2013) using a fair presentation framework. The audit is a group Basis for Adverse Opinion
audit of an entity with subsidiaries (i.e., SA 600 applies).
As explained in Note X, the Group has not consolidated subsidiary PQR Company that the Group
• The consolidated financial statements are prepared by management of the entity in acquired during 20XX because it has not yet been able to determine the fair values of certain of
accordance with the Accounting Standards prescribed under section 133 of the Companies the subsidiary’s material assets and liabilities at the acquisition date. This investment is therefore
Act, 2013 (a general purpose framework). accounted for on a cost basis. Under the accounting principles generally accepted in India, the Group
• The terms of the audit engagement reflect the description of management’s responsibility for should have consolidated this subsidiary and accounted for the acquisition based on provisional
the consolidated financial statements in SA 210. amounts. Had PQR Company been consolidated, many elements in the accompanying consolidated
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financial statements would have been materially affected. The effects on the consolidated financial Answer 3
statements of the failure to consolidate have not been determined. Disclaimer of Opinion: We were engaged to audit the financial statements of ABC & Associates (“the
We conducted our audit in accordance with Standards on Auditing (SAs) specified under section 143(10) entity”), which comprise the balance sheet as at March 31, 20XX, the statement of Profit and Loss,
of the Companies Act, 2013. Our responsibilities under those Standards are further described in the (the statement of changes in equity)(where applicable) and statement of cash flows for the year then
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. ended, and notes to the financial statements, including a summary of significant accounting policies.
We are independent of the Group, its associates and jointly controlled entities, in accordance with We do not express an opinion on the accompanying financial statements of the entity. Because of the
the Code of Ethics and provisions of the Companies Act, 2013 that are relevant to our audit of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
consolidated financial statements in India under the Companies Act, 2013, and we have fulfilled our we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
other ethical responsibilities in accordance with the Code of Ethics and the requirements under the opinion on these financial statements.
Companies act, 2013. We believe that the audit evidence we have obtained is sufficient and appropriate Basis for Disclaimer of Opinion
to provide a basis for our adverse opinion.
We were not appointed as auditors of the Company until after March 31, 20X1 and thus did not observe
the counting of physical inventories at the beginning and end of the year. We were unable to satisfy
Question 3 ourselves by alternative means concerning the inventory quantities held at March 31, 20X0 and 20X1,
which are stated in the Balance Sheets at ` xxx and ` xxx, respectively. In addition, the introduction
As an auditor of ABC Limited, in view of given circumstances, you are required to draft
of a new computerized accounts receivable system in September 20X1 resulted in numerous errors in
disclaimer of opinion and basis for disclaimer of opinion due to the Auditor’s Inability to Obtain
accounts receivable. As of the date of our report, management was still in the process of rectifying the
Sufficient Appropriate Audit Evidence about Multiple Elements of the Financial Statement.
system deficiencies and correcting the errors. We were unable to confirm or verify by alternative means
• Audit of a complete set of financial statements of an entity other than a company incorporated accounts receivable included in the Balance Sheet at a total amount of ` xxx as at March 31, 20X1. As
under the Companies Act, 2013, using a fair presentation framework. The audit is not a a result of these matters, we were unable to determine whether any adjustments might have been found
group audit (i.e., SA 600, does not apply). necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements
• The financial statements are prepared by management of the entity in accordance with the making up the statement of Profit and Loss (and statement of cash flows)( Where applicable).
Accounting Standards issued by the Institute of Chartered Accountants of India (a general
purpose framework).
Question 4
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210. BREW Ltd., FMCG Company having its tea gardens in northeastern states of the country is
exclusively dealing in blending, processing, packing and selling of various brands of Tea. During
• The auditor was unable to obtain sufficient appropriate audit evidence about multiple the year under audit, the company entered into joint venture for purchasing Tea Gardens in
elements of the financial statements, that is, the auditor was also unable to obtain audit Sri Lanka and Kenya. M/s PM & Associates are the statutory auditors of the company for the
evidence about the entity’s inventories and accounts receivable. The possible effects of this financial year 2021-22. During the course of audit, the audit team was unable to obtain sufficient
inability to obtain sufficient appropriate audit evidence are deemed to be both material and appropriate evidence about a single element of the consolidated financial statement being Joint
pervasive to the financial statements. venture investment in Dharma Ltd. representing over 91% of the group’s net assets having
• The relevant ethical requirements that apply to the audit are ICAI’s Code of Ethics and both material and pervasive possible effect to the consolidated financial statements. The group’s
applicable law/regulation investment in Dharma Ltd. is carried at ` 115 crore in the group’s consolidated balance sheet.
• Those responsible for oversight of the financial statements differ from those responsible for Draft the opinion paragraph and basis of opinion paragraph to be included in the Independent
the preparation of the financial statements. Auditor’s report. (MTP 5 Marks Oct ‘22)
• A more limited description of the auditor’s responsibilities section is required. Answer 4
• In addition to the audit of the financial statements, the auditor has other reporting M/s PM & Associates are unable to obtain sufficient appropriate audit evidence about the financial
responsibilities required under relevant law/ regulation. (MTP 5 Marks, March 18) information of a joint venture investment that represents over 91% of the group’s net assets. The

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possible effects of this inability to obtain sufficient appropriate audit evidence are both material and Answer 5
pervasive to the consolidated financial statements. Therefore, the statutory auditor should issue a In the present case, with respect to loans and advances of ₹ 95 Lacs given to Shripal Pvt. Limited,
disclaimer of opinion. the Company has not furnished any agreement to CA Subhadra. In the absence of such an agreement,
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion CA Subhadra is unable to verify the terms of repayment, chargeability of interest and other terms.
paragraph is as under: For an auditor, while verifying any loans and advances, one of the most important audit evidence
Disclaimer of Opinion is the loan agreement. Therefore, the absence of such document in the present case, tantamount to
a material misstatement in the financial statements of the company. However, the inability of CA
We were engaged to audit the accompanying consolidated financial statements of BREW Ltd., Subhadra to obtain such audit evidence is though material but not pervasive so as to require him to
(hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding Company and its give a disclaimer of opinion.
subsidiaries together referred to as “the Group), which comprise the consolidated balance sheet as at
March 31, 2022, the consolidated statement of Profit and Loss, (consolidated statement of changes in Thus, in the present case, CA Subhadra should give a qualified opinion
equity) and consolidated statement of cash flows for the year then ended, and notes to the consolidated The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph
financial statements, including a summary of significant accounting policies (hereinafter referred to as is as under:
the “Consolidated Financial Statements”). Qualified Opinion
We do not express an opinion on the accompanying consolidated financial statements of the Group. In our opinion and to the best of our information and according to the explanations given to us, except
Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of for the effects of the matter described in the Basis for Qualified Opinion section of our report, the
our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for financial statements of SATI Limited give a true and fair view in conformity with the accounting
an audit opinion on these consolidated financial statements. principles generally accepted in India, of the state of affairs of the Company as on 31.03.2022 and
Basis for Disclaimer of Opinion profit/ loss for the year ended on that date.
The Group’s investment in its joint venture Dharma Ltd. Company is carried at ` 115 crore on the Basis for Qualified Opinion
Group’s consolidated balance sheet, which represents over 91% of the Group’s net assets as at March The Company is unable to furnish the loan agreement with respect to loans and advances of ₹ 95 Lacs
31, 2022. given to Shripal Pvt. Limited. Consequently, in the absence of such an agreement, we are unable to
We were not allowed access to the management and the auditors of Dharma Ltd. Company, including verify the terms of repayment, chargeability of interest and other terms.
Dharma Ltd.’s auditors’ audit documentation. As a result, we were unable to determine whether any
adjustments were necessary in respect of the Group’s proportional share of Dharma Ltd.’s assets that
it controls jointly, its proportional share of Dharma Ltd.’s liabilities for which it is jointly responsible, Question 6
its proportional share of Dharma Ltd.’s income and expenses for the year, (and the elements making ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course
up the consolidated statement of changes in equity) and the consolidated cash flow statement. of audit, the statutory auditors have come across certain significant observations which they
believe could lead to material misstatement of financial statements. Management has a different
view and does not concur with the view of the statutory auditors. Considering this the statutory
Question 5 auditors are determining as to how to address these observations in terms of their reporting
CA Subhadra is the statutory auditor of SATI Ltd. for the financial year 2021-22. In respect requirement. Please advise. (MTP 5 Marks, April 19, Old & New SM)
of loans and advances of ₹ 95 lakh given to Shripal Pvt. Ltd., the Company has not furnished Answer 6
any agreement to CA Subhadra and in absence of the same, he is unable to verify the terms of
As per SA 705, if the auditor concludes that, based on the audit evidence obtained, the financial
repayment, chargeability of interest and other terms.
statements as a whole are not free from material misstatement or the auditor is unable to obtain
Justify the type of opinion which CA Subhadra should give in such situation. Also, Draft an sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from
appropriate Opinion paragraph and Basis of Opinion paragraph. (MTP 4 Marks March ’23 & material misstatement, the auditor shall modify the opinion in his report.
April ’23, PYP 4 Marks Dec ‘21)

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The auditor in such a case needs to determine the modification as follows: to the Opinion in the Independent Auditor’s Report”, if, after accepting the engagement, the auditor
becomes aware that management has imposed a limitation on the scope of the audit that the auditor
(i) Qualified Opinion: The auditor shall express a qualified opinion when:
considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, financial statements, the auditor shall request that management remove the limitation.
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
If management refuses to remove the prescribed limitation, the auditor shall communicate the matter to
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, those charged with governance, unless all of those charged with governance are involved in managing
but the auditor concludes that the possible effects on the financial statements of undetected the entity and determine whether it is possible to perform alternative procedures to obtain sufficient
misstatements, if any, could be material but not pervasive. appropriate audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the
(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having auditor shall determine the implications as follows:
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in (i) If the auditor concludes that the possible effects on the financial statements of undetected
the aggregate, are both material and pervasive to the financial statements misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain (ii) If the auditor concludes that the possible effects on the financial statements of undetected
sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes misstatements, if any, could be both material and pervasive so that a qualification of the opinion
that the possible effects on the financial statements of undetected misstatements, if any, could would be inadequate to communicate the gravity of the situation, the auditor shall:
be both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare
1. Withdraw from the audit, where practicable and possible under applicable law or regulation; or
circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having
obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is 2. If withdrawal from the audit before issuing the auditor’s report is not practicable or possible,
not possible to form an opinion on the financial statements due to the potential interaction of the disclaim an opinion on the financial statements.
uncertainties and their possible cumulative effect on the financial statements. If the auditor withdraws as discussed above, before withdrawing, the auditor shall communicate to
If, after accepting the engagement, the auditor becomes aware that management has imposed a those charged with governance any matters regarding misstatements identified during the audit that
limitation on the scope of the audit that the auditor considers likely to result in the need to express a would have given rise to a modification of the opinion.
qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request that
management remove the limitation.
Question 8
If management refuses to remove the limitation, the auditor shall communicate the matter to those
While conducting audit of RAC Limited, CA R has discovered a misstatement in the financial
charged with governance, unless all of those charged with governance are involved in managing the
statements of a company due to non-write off of a huge trade receivable with an outstanding
entity, and determine whether it is possible to perform alternative procedures to obtain sufficient
amount of ` 2 crores.
appropriate audit evidence.
The party in question has fled from India and is now absconding. After reviewing the audit
evidence, it was concluded by the auditor that there is no possibility of recovering the outstanding
Question 7 debt. Despite the matter being brought to the attention of the management, they have refused
After accepting the statutory audit of M/s All-in-All Ltd., a departmental store, you became to correct the misstatement. As a result, the financial statements of the company show a profit
aware of the fact that management of the company have imposed certain limitations on the scope before tax of ` 1 crore, which is incorrect due to the management’s refusal to correct the
of your assurance function which may adversely affect and result in your inability to obtain aforementioned misstatement. Materiality has been determined for financial statements @ 5%
sufficient appropriate audit evidence to discharge your responsibility required by the statute. of profit before tax.
Indicate the consequences and your response to the limitations imposed by the management on Comment as regards to type of opinion to be given by CA R in above situation on the basis of
your scope. (MTP 5 Marks April 22, PYP 4 Marks, May ‘19) provided information. (5 Marks Oct ‘23)
Answer 7 Answer 8
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a Management- SA 705 states that the auditor shall modify the opinion in the auditor’s report when:
Imposed Limitation after the Auditor Has Accepted the Engagement: As per SA 705, Modification
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(a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a Audit Qualifications are given when auditor is
whole are not free from material misstatement or having reservations on some of the items out of Emphasis of Matter is a paragraph which is issued
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial the financial statements as a whole i.e. Auditor’s when there is a uncertainty relating to future
statements as a whole are free from material misstatement. Judgment about the Pervasiveness of the Effects outcome of exceptional litigation, regulatory
In the given situation, auditor has obtained evidence in relation to non-recoverability of outstanding or Possible Effects on the Financial Statements action, etc.; or there is early application (where
trade receivable. relating to if the impact of material misstatements permitted) of a new accounting standard that has
is not pervasive on the financial statements but is a pervasive effect on the financial statements in
SA 705 further states that the auditor shall express an adverse opinion when the auditor, having present at some levels of the financial statements, advance of its effective date.
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the qualified report is issued.
aggregate, are both material and pervasive to the financial statements.
Question 10
In this scenario, the uncorrected misstatement stands at 200% of the profit before tax, while the
materiality has been determined at 5% of the profit before tax. Hence, this misstatement should be You have been appointed as an auditor of Dharmnath & Sons for FY 2020-21, as entity other than
considered as material. Additionally, if such a substantial amount is written off, it would significantly a company incorporated under the Companies Act, 2013, using a fair presentation framework.
impact the financial position of the company. As a result, losses would have to be reported instead Appointment had been made in the month of April, 2021. The financial statements have been
of profits. Taking the above factors into consideration, this misstatement should be classified as both prepared by the management in accordance with the Accounting Standards. The management
material and pervasive. Therefore, adverse opinion needs to be expressed in accordance with the had introduced the new computerized accounts receivable system from November 2020 and
requirements of SA 705. still in the implementation phase and thus management is in the process of rectifying system
deficiencies and correcting the errors. At the time of implementation of a new system, the earlier
system of accounting of receivables had been discarded. The auditor was unable to obtain
Question 9
sufficient appropriate audit evidence about the entity’s accounts receivable and inventories.
Compare and explain the following: Audit Qualification vs. Emphasis of Matter.(RTP May’18, The possible effects of the inability to obtain sufficient appropriate audit evidence are deemed
Old & New SM) to be both material and pervasive to the financial statements. Write the opinion paragraph and
Answer 9 basis of opinion paragraph to be included in the Independent Auditor’s Report. (RTP May 22)
(a) Answer 10
(i) Audit Qualification vs. Emphasis of Matter: Opinion Paragraph Disclaimer of Opinion
We were engaged to audit the financial statements of Dharmnath & Sons (“the entity”), which comprise
REPORT the balance sheet as at March 31, 2021, the statement of Profit and Loss, (the statement of changes in
Audit Qualification Emphasis of Matter equity) and the statement of cash flows for the year then ended, and notes to the financial statements,
Standard on Auditing 705 “Modifications to the Standard on Auditing 706 “Emphasis of Matter including a summary of significant accounting policies.
Opinion in the Independent Auditor’s Report”, Paragraphs and Other Matter Paragraphs in the We do not express an opinion on the accompanying financial statements of the entity. Because of the
deals with the provisions relating to Audit Independent Auditor’s Report” deals with the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
Qualification. provisions relating to Emphasis of Matter. we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
Emphasis of Matter is a paragraph which is opinion on these financial statements.
included in auditor’s report to draw users’ Basis for Disclaimer of Opinion
Audit Qualifications are also known as “subject attention to important matter(s) which are We were not appointed as auditors of the Company until after March 31, 2021 , and thus did not observe
to report” or “except that report”. already disclosed in Financial Statements and the counting of physical inventories at the beginning and end of the year. We were unable to satisfy
are fundamental to users’ for understanding of ourselves by alternative means concerning the inventory quantities held at March 31, 2020, and 2021,
Financial Statements. which are stated in the Balance Sheets at ` xxx and ` xxx, respectively. In addition, the introduction
of a new computerized accounts receivable system in November 2020 resulted in numerous errors in
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accounts receivable. As of the date of our report, management was still in the process of rectifying Thus, CA Bahubali should give a Disclaimer of Opinion.
the system deficiencies and correcting the errors. We were unable to confirm or verify by alternative The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
means accounts receivable included in the Balance Sheet at a total amount of ` xxx as at March 31, paragraph is as under:
2021. As a result of these matters, we were unable to determine whether any adjustments might have
Disclaimer of Opinion
been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and
the elements making up the statement of Profit and Loss (and statement of cash flows) We do not express an opinion on the accompanying financial statements of Bharat Ltd. Because of
the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
Question 11 opinion on these financial statements.
CA Bahubali is the statutory auditor of Bharat Ltd. for the FY 2021-22. During the course of Basis for Disclaimer of Opinion
audit CA Bahubali noticed the following:
We are unable to obtain balance confirmation with respect to the debtors amounting to ` 240 crore.
(i) With respect to the debtors amounting to ` 240 crore, no balance confirmation was received
Further, there have been defaults on the payment obligations by debtors on the due dates during the
by the audit team. Further, there have been defaults on the payment obligations by debtors
year under audit. The Company has created a provision for doubtful debts to the tune of ` 40 crore
on the due dates during the year under audit. The Company has created a provision for
during the year under audit which is inadequate in the circumstances of the company. The carrying
doubtful debts to the tune of `40 crore during the year under audit. The Company has stated
value of trade receivables could not be ascertained.
that the provision is based on receivables which are older than 39 months, which according
to the audit team is inadequate and as such the audit team is unable to ascertain the carrying Further, in respect of Inventories (which constitutes 38% of the total assets of the company), during the
value of trade receivables. reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. We were
(ii) In respect of Inventories (which constitutes 38% of the total assets of the company), during
unable to undertake the physical inventory count and as such the value of inventory could not be
the reporting period, the management has not undertaken physical verification of inventories
verified.
at periodic intervals. Also, the Company has not maintained adequate inventory records at
the factory. The audit team was unable to undertake the physical inventory count as such the
value of inventory could not be verified. Question 12
Under the above circumstances what kind of opinion should CA Bahubali give? Write the CA. K is appointed statutory auditor of SEEK INDIA PVT LTD under the Companies Act
opinion paragraph and basis of opinion paragraph to be included in the Independent Auditor’s 2013 for the first time. The company is preparing its accounts, considering the applicable
Report. (RTP Nov’22) requirements of Division I of Schedule III of the Companies Act, 2013. On scrutinizing, the
Answer 11 company’s financial statements for an audit, it was noticed that notes to accounts show the
ageing of trade payables as per amended requirements of the Schedule III of the Companies
In the present case, CA Bahubali is unable to obtain sufficient and appropriate audit evidence with
Act, 2013.
respect to the following:
The ageing schedule forming part of the notes is as under: -
(i) The balance confirmation with respect to debtors amounting to ` 240 crore is not available.
Outstanding for following periods from the due date of payment (In ` crore)
Further there has been default in payment by the debtors and the provision so made is not adequate.
The audit team is also unable ascertain the carrying value of trade receivables.
Less than 1 1-2 More than
Particulars 2-3 years Total
(ii) With respect to 38% of the company’s inventory, neither the physical verification has been done year years 3 years
by the management nor are adequate inventory records maintained. The audit team is also unable MSME NIL NIL NIL NIL NIL
to undertake the physical inventory count as such the value of inventory could not be verified.
Others 2 4 3 1 10
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence
Disputed dues- MSME NIL NIL NIL NIL NIL
on which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive. Disputed dues others NIL NIL NIL NIL NIL

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Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit Question 13
ratio disclosed in notes to accounts have slipped drastically as compared to last year and from In the financial year 2022-23, MOKSH Ltd. faced an extraordinary event (earthquake), which
standard norms. Most of the key financial ratios are in red. destroyed a lot of business activity of the company. These circumstances indicate material
There is no other relevant information concerning above in notes to accounts. uncertainty on the company’s ability to continue as going concern. Due to such event, it may not
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), be possible for the company to realize its assets or pay off the liabilities during the regular course
it was noticed that there is no debit transaction in month of March 2022. On inquiry, he came to of its business. The financial statement and notes to the financial statements of the company do
know that the company’s stock audit was conducted in January, 2022 and stock auditors have not disclose this fact. What kind of opinion should the statutory auditor of MOKSH Ltd. issue
commented vide their report dated 25.2.2022 that the company had negative drawing power in such circumstances? (RTP Nov ’23, MTP 5 Marks Mar’22, Old & New SM)
due to high creditors. Accordingly, the bankers have refused further debits in the cash credit Answer 13
account since March 2022. In the present case, there exists a material uncertainty that cast a significant doubt on the company’s
Further, upon inquiry with the management, it was identified that management did not have ability to continue as going concern and the same is not disclosed in the financial statements of
any major future contracts to boost their revenue and financial position. MOKSH Ltd.
There is no information in this respect in financial statements and notes to accounts. As such, the financial statements of MOKSH Ltd. for the FY 2022 -23 are materially misstated and the
Discuss how CA K should deal with above for reporting in his audit report under Companies effect of the misstatement is so material and pervasive on the financial statements that giving only a
Act, 2013. (RTP May ’23) qualified opinion will be insufficient and therefore the statutory auditor of MOKSH Ltd. should issue
an adverse opinion.
Answer 12
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
It is clear from the ageing schedule that company is not able to pay its creditors on time. Outstanding
as under:
to creditors for a period of 1 year or more account for 80% of total creditors of the company. Most of
key financial ratios are adverse. Adverse Opinion
Further, bankers have refused further debits in cash credit account due to negative drawing power In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion
from March 2022. Cash credit loans are repayable on demand. There is no other information available section of our report, the accompanying financial statements do not present fairly, the financial position
how the company plans to run its business without bank finance. of MOKSH Ltd. as at March 31, 2023, and of its financial performance and its cash flows for the
year then ended in accordance with the Accounting Standards issued by the Institute of Chartered
Also, Further, upon inquiry with the management, it was identified that management did not have any
Accountants of India.
major future contracts to boost their revenue and financial position.
Basis for Adverse Opinion
All the above factors are indicators that a material uncertainty exists that may cast significant doubt
on the company’s ability to continue as a going concern. There is no express disclosure of this fact in MOKSH Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity
financial statements. of the company. Due to such event, it may not be possible for the company to realize its assets or pay off
the liabilities during the regular course of its business. This situation indicates that a material uncertainty
Therefore, it is a situation where material uncertainty exists, which has cast significant doubt on
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The
company’s ability to continue as going concern in accordance with SA 570 , Going Concern.
financial statement and notes to the financial statements of the company do not disclose this fact.
Considering above the fact that although a material uncertainty exists casting significant doubt on the
ability of the company to continue as going concern, adequate disclosure of material uncertainty is not
made in financial statements. Thus, CA K shall give qualified or adverse opinion in accordance with Question 14
SA 705, “Modifications to the Opinion in the Independent Auditor’s Report. CA. Uma is the Statutory Auditor of RJ Ltd. for the financial year 2021-22. The company is
engaged in the production of electronic products. During the course of audit, CA. Uma obtained
certain audit evidence of incorrect disclosure of related party transactions and structured
finance deals which was not considered with the affirmation leading to misstatement in the

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Discuss how CA Uma should deal with the situation in the auditor’s report and the different Answer 15
options which can be considered? (PYP 5 Marks Nov 22) Opinion Paragraph of Audit Report: In the instant case, M/s Hary Ltd. acquired 55% shares in M/s
Answer 14 Sam Ltd. and the company did not prepare the consolidated financial statements because on the date of
Auditor’s duties in case of inconsistency in Audit evidence: SA 705 “Modifications to the Opinion in acquisition the fair value of certain assets and liabilities has not been ascertained. Therefore, accounting
the Independent Auditor’s Report”, deals with auditor’s responsibility to issue an appropriate report is done on estimate basis only which is not correct as the financial statements are materially misstated
in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor due to non-consolidation of subsidiary. The material misstatement is deemed to be pervasive to the
concludes that a modification to the auditor’s opinion on the financial statements is necessary. 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
The decision regarding which type of modified opinion is appropriate depends upon:
in the aggregate, are both material and pervasive to the financial statements.
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are
Adverse Opinion
materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence,
may be materially misstated; and 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,
(b) The auditor’s judgement about the pervasiveness of the effects or possible effects of the matter on
the accompanying consolidated financial statements do not give a true and fair view in conformity
the financial statements.
with the accounting principles generally accepted in India, of their consolidated state of affairs of the
Further, the auditor shall modify the opinion in the auditor’s report when the auditor concludes that Group, its associates and jointly controlled entities, as at March 31, 2019, of its consolidated profit/loss,
based on the audit evidence obtained, that the financial statements as a whole are not free from material (consolidated position of changes in equity) and the consolidated cash flows for the year then ended.
misstatement:
Basis for Adverse Opinion is given below:
In the present case, during the course of the audit, CA Uma obtained certain audit evidence which was
As explained in Note X, the M/s Hary Ltd. has not consolidated subsidiary M/s Sam Ltd. that the M/s
not consistent with the affirmation made in financial statements. Therefore CA Uma should modify
Hary Ltd acquired during 2018 because it has not yet been able to determine the fair values of certain
his report in accordance with SA 705.
of the subsidiary’s material assets and liabilities at the acquisition date. This investment is therefore
Conclusion: accounted for on an estimate basis. Under the accounting principles generally accepted in India, the
Since CA Uma has obtained audit evidence which is inconsistent with the affirmations made in the Group should have consolidated this subsidiary and accounted for the acquisition based on provisional
financial statements. CA Uma should modify his opinion as per the circumstances of the case. 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
• CA Uma shall express Qualified opinion when, having obtained sufficient appropriate audit
statements of the failure to consolidate have not been determined.
evidence, he concludes that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements.
• CA Uma shall express an Adverse opinion, where the auditor, having obtained sufficient appropriate Question 16
evidence, concludes that misstatements, individually, or in the aggregate, are both material and ABC Ltd. has been dealing in tyres since 1995. The Company envisaged to expand its business
pervasive to the financial statements. and wanted to manufacture the tyres besides trading. Accordingly, the machinery was
imported, installed and manufacturing operations commenced. The Government also gave
certain incentives like power subsidy, land acquisition subsidy, etc. After 2 years of operations,
Question 15
Company received a notice from the Income Tax authorities to pay tax on incentive received in
ALM Associates has been appointed as auditor of M/s Hary Ltd. which acquired 55% shares-in the form of power subsidy. The demand notice was served for ` 150.00 Lakhs.
M/s Sam Ltd. on 15th October, 2018. During audit of Harry Ltd., the auditors found that the
The Company, however, filed an appeal with higher tax authorities against the demand and the
company has not prepared consolidated financial statements because on the date of acquisition
matter is undecided as on 31.03 .2021. Legal team of the Company anticipated that tax liability
the fair value of certain assets & liabilities has not been ascertained which is significant and are
might mature. The Company has not made a provision of anticipated ta x liability. Considering
accounted for on estimated basis only. Help ALM Associates in framing opinion paragraph of
the provisions of Companies Act, 2013, how an auditor of ABC Ltd. should see this matter and
audit report. (PYP 4 Marks, May ‘19)
report in audit report, if required?(PYP 5 Marks July 21)

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Answer 16 • When reporting in accordance with a compliance framework, the accompanying financial statements
Audit report - Legal team anticipated tax liability but the company did not make any provision for have been prepared, in all material respects, in accordance with [the applicable financial reporting
that- framework].
The Council of the Institute of Chartered Accountants of India has taken note of the fact that there When the modification arises from an inability to obtain sufficient appropriate audit evidence, the
is a practice prevalent whereby companies do not make provision for tax even when such a liability auditor shall use the corresponding phrase “except for the possible effects of the matter(s) ...” for
is anticipated. It has expressed the view that on an overall consideration of the relevant provisions the modified opinion.
of law, non-provision for tax (where a liability is anticipated) would amount to contravention of the (b) When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s
provisions of Sections 128 and 129 of the Companies Act, 2013. opinion, because of the significance of the matter(s) described in the Basis for Adverse
Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring Opinion section:
out the manner in which the accounts do not disclose a “true and fair” view of the state of affairs of • When reporting in accordance with a fair presentation framework, the accompanying financial
the company and the profit or loss of the company. statements do not present fairly (or give a true and fair view of) […] in accordance with [the
Applying the above to the facts given in the question, auditor should qualify his report. applicable financial reporting framework]; or
An example of the manner in which the report on the balance sheet and the Statement of Profit and • When reporting in accordance with a compliance framework, the accompanying financial
Loss may be qualified in this respect is given below: “The company has not provided for taxation in statements have not been prepared, in all material respects, in accordance with [the applicable
respect of its profits and the estimated aggregate amount of taxation not so provided for is ` ............ financial reporting framework].
including.............for the Year ended on ..............To the extent of such non-provision for the year, the (c) When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate
profits of the Company for the financial year under report have been overstated and to the extent of audit evidence, the auditor shall:
such aggregate non-provision, the reserves of the company appearing in the said balance sheet have • State that the auditor does not express an opinion on the accompanying financial statements;
been over-stated and the current liabilities and provisions appearing in the said balance sheet have
been understated”. • State that, because of the significance of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and
Question 17 • Amend the statement required in SA 700 (Revised), which indicates that the financial statements
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified have been audited, to state that the auditor was engaged to audit the financial statements.
Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” As an
expert you are required to brief the special considerations required for expressing:
(a) Qualified Opinion;
(b) Adverse Opinion and
(c) Disclaimer of Opinion. (RTP Nov’18, RTP May’20, Old & New SM)
Answer 17
(a) When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the
matter(s) described in the Basis for Qualified Opinion section:
• When reporting in accordance with a fair presentation framework, the accompanying financial
statements present fairly, in all material respects (or give a true and fair view of) […] in accordance
with [the applicable financial reporting framework]; or

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Multiple Choice Questions (MCQs) statements, to reduce the pressures of meeting market expectations and to increase the reputation
of the company. What would be the implications on the auditor’s report if no adjustments are
Question 1
made to the financial statements regarding the misstatements made by the management?
While conducting the current year audit of Finco Ltd, the auditor obtains audit evidence that
(a) The auditor would issue a qualified audit opinion stating that ‘except for’ these matters the financial
a material misstatement exists in the prior period financial statements. This misstatement was
statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
related to recognition of research and development expenditure. The provisions of Ind AS 38
paragraph below the opinion paragraph.
Intangible Assets relating to capitalization of development expenditure was not applied properly.
On this, unmodified opinion had been previously issued. The current auditor verified that the (b) The auditor would issue an adverse audit opinion stating that ‘except for’ these matters the financial
misstatement had not been dealt with as required under Ind AS 8 Accounting Policies, Changes statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
in Accounting Estimates and Errors. paragraph below the opinion paragraph.
Accordingly, the current auditor will: (c) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give
a true and fair view’. The auditor should also include a ‘Basis for Adverse Opinion’ paragraph
(a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
below the opinion paragraph.
statements modified with respect to the corresponding figures included therein.
(d) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give
(b) Express an unmodified opinion in the auditor’s report on the current period financial statements
a true and fair view’. The auditor should also include a ‘Basis for Qualified Opinion’ paragraph
since it was related to the prior year.
below the opinion paragraph. (MTP 1 Marks, April 21, Sep’23)
(c) Express a qualified opinion in the auditor’s report on the current period financial statements,
Ans: (c)
modified with respect to the corresponding figures included therein.
(d) Express an adverse opinion in the auditor’s report on the current period financial statements,
modified with respect to the corresponding figures included therein. (MTP 2 Marks, Oct 19 & Question 4
April ‘23) M/s Brahmi and Associates have been appointed as the statutory auditor of Prompton Leaves
Ans: (a) Limited, a manufacturer of gas geysers for the FY 2021-22. During the course of audit, the
auditor found that two customer complaints have been filed against the company in the FY
2021-22, for the use of sub standard pipes and wires in manufacture of gas geysers. The gas
Question 2 geyser blasted at high temperature leading to severe injuries to the family of complainant along
The auditor shall express opinion when the auditor, having obtained sufficient appropriate audit with damage to their property. They have sought a demand of rupees 10 crore. However, the
evidence, concludes that misstatements, individually or in the aggregate, are both material and lawyer of Prompton Leaves Limited believes that such claim is unsustainable as the incident
pervasive to the financial statements occurred due to short circuit at both the complainants place. The management of Prompton
Leaves Limited accordingly did not include any reference to the litigation in the financial
(a) Adverse
statements. The auditor obtained legal advice from some independent lawyer according to
(b) Qualified whom the outcome of the case is not ascertainable as of now.
(c) Disclaimer of opinion (a) The statutory auditor should give an unqualified opinion.
(d) Clean (MTP 1 Marks, May 20) (b) The statutory auditor should give an unqualified opinion with Emphasis of Matter paragraph.
Ans: (a). (c) The statutory auditor should withdraw from the audit engagement.
(d) The statutory auditor should give a qualified opinion. (MTP 1 Mark March 22)
Question 3 Ans: (d)
During the conduct of audit, it was found that the management has intentionally made material
misstatements in the several items of the financial statements to deceive the users of the financial

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Question 5 SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
While verifying the salary expense of employees, the auditor has been asked to rely on the Independent Auditor’s Report
values as per SAP software and some hard copy reports and documents as the HRMS package
Question 1
(source software) has become corrupt during the year and the management is not having any
data backup. Difficult Books Limited is engaged in manufacturing of active pharmaceutical ingredients. Due to
change in laws and regulations, every company engaged in manufacturing in active pharmaceutical
How should the auditor deal with the same?
ingredients would now require production capacity license which will restrict the production
(a) The auditor should issue a qualified opinion as records are destroyed and he is unable to obtain of companies. Management of the company assessed the impact of the change in law over the
sufficient appropriate audit evidence. financial position of company and appropriately disclosed the same in the financial statement.
(b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit Audit Team of the company evaluated management’s disclosure and found it appropriate and
evidence before disclaiming the opinion. sufficient.
(c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls. However, considering the said matter as most important and fundamental to users understanding
(d) The auditor can rely on the SAP data and there is no need for qualification of report. (MTP 1 Mark regarding financial statement the audit team decided to disclose the same in Other Matter Paragraph.
April 22) You as an Engagement Partner are required to guide the Audit Team with respect to reporting
Ans: (b) of the said matter in Audit Report. (MTP 4 Marks Oct ‘22)
Answer 1
Question 6 As per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report” if the auditor considers it necessary to draw users’ attention to a matter presented
Chandra Ltd. is a company engaged in the manufacture of iron and steel bars. VP & Associates
or disclosed in the financial statements that, in the auditor’s judgment, is of such importance t hat it is
are the statutory auditors of Chandra Ltd. for the FY 2022-23. During the course of audit,
fundamental to users’ understanding of the financial statements, the auditor shall include an Emphasis
CA Vikash, the engagement partner, found that the Company’s financing arrangements have
of Matter paragraph in the auditor’s report provided:
expired, and the amount outstanding was payable on March 31, 2023. The Company has been
unable to re - negotiate or obtain replacement financing and is considering filing for bankruptcy. i. The auditor would not be required to modify the opinion in accordance with SA 705 as a result of
These events indicate a material uncertainty that may cast significant doubt on the Company’s the matter; and
ability to continue as a going concern and therefore it may be unable to realize its assets and ii. When SA 701 applies, the matter has not been determined to be a key audit matter to be
discharge its liabilities in the normal course of business. The financial statements (and notes communicated in the auditor’s report.
thereto) do not disclose this fact. In the instant case, since Difficult Books Limited is engaged in manufacturing of active pharmaceutical
What opinion should CA Vikash express in the case of Chandra Ltd.? ingredients, would now require production capacity license which will restrict the production of
(a) Unmodified opinion. companies, due to change in laws and regulations. Management of the Difficult Books Limited
assessed the impact of the change in law over the financial position of company and appropriately
(b) Qualified opinion.
disclosed the same in the financial statement.
(c) Adverse opinion.
Audit team of the Difficult Books Limited evaluated management’s disclosure and found it appropriate
(d) Disclaimer of opinion. (MTP 1 Mark April ’23, RTP May’22) and sufficient. However, considering the said matter as most important and fundamental to users
Ans: (c) understanding regarding financial statement the audit team decided to disclose the same.
The said matter is already disclosed and presented appropriately in financial statement and is of such
importance that is fundamental to the users understanding of the financial statement and hence, it
required to be disclosed under Emphasis of Matter paragraph. Therefore, decision of audit team to
disclose the same in Other Matter Paragraph is not in order, it should be disclosed in Emphasis of
Matter Paragraph.
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The audit report of Kolsi (P) Ltd. for F.Y. 2020-21 was issued by Bishnoi & Co. on 25th July, (Includes concepts of SA 800- Special Considerations- Audits of Financial Statements prepared
2021. in accordance with Special Purpose Framework)
However, a case was filed against Kolsi (P) Ltd. on 4th August, 2021, with the Civil Court, with There are certain circumstances in which Emphasis of Matter in Auditor’s Report is mandated
respect to an incident caused in its factory on 17th January, 2021, the outcome of which may to be included. Explain this statement in the light of mandatory requirements of matters that
result in paying heavy penalty by Kolsi (P) Ltd. are to be emphasized in Auditor’s Report when the Audit Report is on Financial Statements
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the management prepared in accordance with Special Purpose Framework. (PYP 5 Marks, Nov ‘18)
and it was determined to amend the financial statements for F.Y. 2020 -21. Further, Mr. Raj Answer 3
inquired how the management intended to address the said matter in the financial statements to Circumstances in which Emphasis of Matter Paragraph in Auditor’s Repo rt is mandated in case of
which he was told that the said matter was going to be disclosed as a “Contingent Liability for a Financial Statements prepared in accordance with a Special Purpose Framework: As per SA 706,
Court case” to the foot note in the balance sheet with no additional disclosures. “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”
The management told Mr. Raj that such disclosure was enough as he would further going a and/or SA 800, “Special Considerations— Audits of Financial Statements Prepared in Accordance
description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his with Special Purpose Frameworks”, the auditor’s report on special purpose financial statements
amended audit report. shall include an Emphasis of Matter paragraph alerting users of the auditor’s report that the financial
In the context of aforesaid case scenario, please answer the following questions:- statements are prepared in accordance with a special purpose frame work and that, as a result, the
financial statements may not be suitable for another purpose. The auditor shall include this paragraph
Whether the contention of management of Kolsi (P) Ltd. is valid with respect to the disclosure
under an appropriate heading.
of the court case in the financial statements? (RTP Nov ’21)
The special purpose financial statements may be used for purposes other than those for which they
Answer 2
were intended. For example, a regulator may require certain entities to place the special purpose
As per SA 706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent financial statements on public record. To avoid misunderstandings, the auditor alerts users of the
Auditor’s Report’, an Emphasis of Matter paragraph is not a substitute for: auditor’s report that the financial statements are prepared in accordance with a special purpose frame
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances of work and, therefore, may not be suitable for another purpose.
a specific audit engagement; Restriction on Distribution or Use: In addition to the alert required above, the auditor may consider
(b) Disclosures in the financial statements that the applicable financial reporting framework requires it appropriate to indicate that he auditor’s report is intended solely for the specific users. Depending on
management to make, or that are otherwise necessary to achieve fair presentation; or the law or regulation of the particular jurisdiction, this may be achieved by restricting the distribution
or use of the auditor’s report. In these circumstances, the emphasis of matter paragraph given above
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to
maybe expanded to include these other
events or conditions that may cast significant doubt on an entity’s ability to continue as a going
concern.
In the given case, the management of Kolsi (P) Ltd. has presumed that as the auditor was going to Question 4
provide a description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in Relevant Notes given by the management in the financial statements of India Branch Office of
his amended audit report, there was no further need for it to provide additional disclosures about the ABC Limited are:
court case in the financial statements.
Income tax authorities have raised demands (including interest up to the date of demand)
The said contention of management of Kolsi (P) Ltd. is not valid as ‘Emphasis of Matter’ paragraph aggregating to Rs.100 crores and Rs.40 crores respectively for assessment year 2013-14 based
cannot be used as a substitute for disclosures required to be made in the financial statements as per the on report by auditors consequent to conduct of special audit as directed under section 142(2A)
applicable financial reporting framework or that is otherwise necessary to achieve fair presentation, of the Income tax Act, 1961 and in addition, have also initiated penalty proceedings against
which is the responsibility of the management. the Company. The Company has contested these demands before the Commissioner of Income
tax (Appeals) and has also filed applications for stay of penalty proceedings and the same are
currently pending disposal.
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Based on review of underlying documents and legal inputs, the management has assessed that Question 5
there is probability of likely outflow to the extent of Rs.50 crores (including interest liability till (Includes concepts of SA 705)
date of stay of payment of Rs.15 crores) in relation to the above demands and has accounted
AKB Associates, a renowned audit firm in the field of CA practice for past two decades. The firm
for the same in these financial statements. With respect to further liability of Rs.50 crores, the
was appointed to conduct statutory audit of Rica Ltd. an unlisted company, which is engaged
management believes that it has the necessary documents to furnish to the tax authorities and
in the business of paper manufacturing. It decided to commence the audit for the recently
basis the expert’s inputs believes that Company has good chances of success of receiving the
concluded financial year. Once after making significant progress in the audit, the auditors made
judgments in its favour. Further, the management believes that the likelihood of penalties being
the following observations:
imposed against the Company is not probable and accordingly, no adjustments are considered
necessary in these financial statements. Observation 1: The management had disclosed in the financials that, during the year, one of
the warehouses of the Company was affected due to a major flood. As a result of the same,
As at March 31, 2017, the Company has accumulated losses of Rs.150 crores against equity of
the Company had incurred some losses. But the management was of the view that it was not
Rs.100 crores and also net current liabilities of Rs.35 crores. The management is of the view
material.
that the current year losses are primarily attributable to income tax liabilities devolving on the
Company, as discussed under paragraph XX. As per the management assessment, it is likely to Observation 2: Due to flood, few records maintained by the Company with respect to a particular
generate Rs.___ and Rs. from the operations during the financial years ending March 31, 2018 transaction was completely destroyed and there was no duplicate record maintained by the
and March 31, 2019 respectively. Further, the Company’s key shareholders have confirmed that Company. However, those details were not pervasive, but material.
they shall provide continuing financial support to the Company’s day to day operations so as to You are required to advise, whether AKB Associates should report Observation 1 and 2 in its
enable the Company to pay off its debts, as and when they fall due. Accordingly, these financial audit report? If so, under which heading should it be reported? (RTP Nov 20)
statements have been prepared on a going concern basis.
Answer 5
As an auditor of ABC Limited, you are required to draft emphasis of matter para in the given
Observation 1 - The management had disclosed in the financials that, during the year, one of the
situation on the basis of analysis of above notes (when there is material tax litigation that casts
warehouses of the Company was affected due to a major flood. As a result of the same, the Company
significant doubt on the entity being regarded as going concern) (RTP May 18)
had incurred some losses. But the management was of the view that it was not material: As per SA
Answer 4 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent Auditor’s Report”,
Emphasis of Matters Para: an Emphasis of Matter Paragraph refers to matter appropriately disclosed in the financials, that in
the auditor’s judgement is of such importance that it is fundamental to users’ understanding of the
• We draw attention to Note XX, regarding certain income-tax demands of Rs.100 crores pending
financials. Hence, in this case, the auditor shall report about the consequences of the flood which
in various stages of assessments/ appeals. The management based upon expert’s advice believes
affected the Company’s warehouse under Emphasis of Matter Paragraph.
that no demand or liability including interest and penalty on account of settlement of assessment/
appeals of the pending matters by the Income tax authorities is likely to devolve on the Company, Observation 2 - Due to flood, few records maintained by the Company with respect to a particular
in addition to those already provided for in these financial statements. Pending the final outcome transaction was completely destroyed and there was no duplicate record maintained by the Company.
of the aforesaid matters, no further adjustments have been made in these financial statements in However, those details were not pervasive, but material: As per SA 705, “Modification to Opinion in
this regard. the Independent Auditor’s Report”, where the auditor is unable to obtain sufficient and appropriate
audit evidence and where such mater is material but not pervasive, the auditor shall issue a qualified
• Note XX of the financial statements that as at March 31, 2017, the Company has accumulated losses
opinion.
of Rs.150 crores against equity of Rs.100 crores and also net current liabilities of Rs.35 crores.
These conditions indicate the existence of a material uncertainty that may cast significant doubt Thus, in the given situation, on account of flood few records pertaining to particular transactions
about the Company’s ability to continue as a going concern, which is dependent on establishing was completely destroyed and in the absence of duplicate records, the auditor was unable to obtain
profitable operations and obtaining continuing financial support from its key shareholders. These sufficient and appropriate audit evidence and those details were material but not pervasive. Therefore,
mitigating factors have been more fully discussed in Note XX of the accompanying financial in accordance with SA 705, the auditor is required to issue qualified opinion.
statements, in view of which the accompanying financial statements have been prepared under
the going concern assumption, and consequently, no further adjustments have been made in these
financial statements. Our opinion is not modified in respect of the above matters.

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Question 6 Multiple Choice Questions (MCQs)

Where should the placement of the key audit matters section be in the auditor’s report? (RTP Question 1
May 22)
APP Ltd. is listed on National Stock Exchange in India. Post audit rotation, KYP & Co LLP
Answer 6 have been appointed as the statutory auditors of APP Ltd. The company has a pending litigation
Generally, the Key Audit Matters section is required to be placed after the Basis for Opinion paragraph in respect of service tax matter which has been going on for long time now and exposure of the
and before the Management’s Responsibility paragraph. company towards that litigation is very significant.
In case, ‘Material uncertainty relating to going concern’ section is required as per SA 570(Revised), The new auditors got the exposure of this case evaluated by involving their in-house tax
then KAM section is placed after that section. experts who have shared a view that the exposure of the company would be medium. As per
the requirements of accounting standards, medium exposure would be considered as a possible
Further, regarding placement of KAM section, SA 706 (Revised), “Emphasis of Matter Paragraphs
impact for which probability is 50%. The company has been disclosing this as a contingent
and Other Matter Paragraphs in the Independent Auditor’s Report” provides as under:
liability in the previous years.
When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter (EOM)
However, the new auditors are of the view that this is a significant matter that requires user’s
paragraph may be presented either directly before or after the Key Audit Matters section, based on
attention by disclosing this in the financial statements and it is of such importance that it is
the auditor’s judgment as to the relative significance of the information included in the Emphasis of
fundamental to user’s understanding of financial statements. Further there is a material
Matter paragraph. The auditor may also add further context to the heading “Emphasis of Matter”, such
uncertainty in respect of this matter (i.e. demand raised by service tax department).
as “Emphasis of Matter – Subsequent Event”, to differentiate the Emphasis of Matter paragraph from
the individual matters described in the Key Audit Matters section. Basis this, auditors want to include Emphasis of matter (EOM) in their report. Management is
of the view that since this was not reported by previous auditors as EOM, hence it should not be
included by new auditors also and also being a listed company, it is not appropriate to include
EOM in the first year of audit by a new firm. (MTP 2 Marks, April 19)
Please suggest which of the following is correct.
(a) EOM should be included by new auditors.
(b) EOM should not be included by new auditors if the previous auditors have not given that.
(c) EOM should not be given, however, there should be a disclosure of this matter in the financial
statements and also the fact that auditors are in the first year of audit and this matter would require
detailed evaluation.
(d) Auditors should quality the report instead of EOM.
Ans: (a)

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SA 710 Comparative Information—Corresponding Figures and Comparative (i) The company does not make provision for doubtful debts in 2017-18?
Financial Statements (ii) The company makes adequate provision for doubtful debts in 2017-18? (MTP 5 Marks,
Question 1 March 18)
It was observed from the modified audit report of the financial statements of Shravasti Ltd. for Answer 2
the year ended 31st March, 2021 that depreciation of ₹ 3.95 crore for the year 2020-2021 had Auditor’s responsibilities in cases where audit report for an earlier year is qualified is given in SA 710
been charged off to the Statement of Profit and Loss instead of including it in “carrying value
“Comparative Information – Corresponding Figures and Comparative Financial Statements”. As per
of asset under construction”. State in relation to the audit for the year ended 31st March 2022,
SA 710, When the auditor’s report on the prior period, as previously issued, included a qualified
whether such modification in the previous year’s audit report would have any audit implication
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modified
for the current year i.e. FY 2021-22 and if yes, how the auditor is required to deal with the same
opinion is resolved and properly accounted for or disclosed in the financial statements in accordance
in his audit report for the current year? (MTP 5 Marks March ’23, MTP 5 Marks Oct’20)
with the applicable financial reporting framework, the auditor’s opinion on the current period need not
Answer 1 refer to the previous modification.
Auditor’s responsibility in cases where audit report for an earlier year is qualified is given in SA 710 SA 710 further states that if the auditor’s report on the prior period, as previously issued, included a
“Comparative Information – Corresponding Figures and Comparative Financial Statements”. qualified opinion and the matter which gave rise to the modification is unresolved, the auditor shall
As per SA 710, when the auditor’s report on the prior period, as previously issued, included a qualified modify the auditor’s opinion on the current period’s financial statements. In the Basis for Modification
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modified paragraph in the auditor’s report, the auditor shall either:
opinion is resolved and properly accounted for or disclosed in the financial statements in accordance (i) Refer to both the current period’s figures and the corresponding figures in the description of the
with the applicable financial reporting framework, the auditor’s opinion on the current period need not matter giving rise to the modification when the effects or possible effects of the matter on the
refer to the previous modification. current period’s figures are material; or
SA 710 further states that if the auditor’s report on the prior period, as previously issued, included a (ii) In other cases, explain that the audit opinion has been modified because of the effects or possible
qualified opinion and the matter which gave rise to the modification is unresolved, the auditor shall effects of the unresolved matter on the comparability of the current period’s figures and the
modify the auditor’s opinion on the current period’s financial statements. In the Basis for Modification corresponding figures.
paragraph in the auditor’s report, the auditor shall either:
In the instant Case, if P Ltd. does not make provision for doubtful debts the auditor will have to
Refer to both the current period’s figures and the corresponding figures in the description of the matter modify his report for both current and previous year’s figures as mentioned above. If however, the
giving rise to the modification when the effects or possible effects of the matter on the current period’s provision is made, the auditor need not refer to the earlier year’s modification.
figures are material; or In other cases, explain that the audit opinion has been modified because of the
effects or possible effects of the unresolved matter on the comparability of the current period’s figures
and the corresponding figures. Question 3
In the instant case, if Shravasti Ltd. does not correct the treatment of depreciation to the extent of Write a short note on the following: Auditor’s responsibilities regarding comparatives. (RTP Nov 18)
rupees 3.95 crore for previous year, the auditor will have to modify his report for both current and Answer 3
previous year’s figures as mentioned above. If, however, the figures and provisions are corrected, the
Auditor’s responsibilities regarding comparatives: SA 710, “Comparative Information –
auditor need not consider to the earlier year’s modification.
Corresponding Figures and Comparative Financial Statements”, establishes standards on the auditor’s
responsibilities regarding comparatives.
Question 2 The auditor shall determine whether the financial statements include the comparative information
The audit report of P Ltd. for the year 2016-17 contained a qualification regarding non-provision required by the applicable financial reporting framework and whether such information is appropriately
of doubtful debts. As the statutory auditor of the company for the year 2017-18, decide how classified. For this purpose, the auditor shall evaluate whether:
would you report, if : (i) The comparative information agrees with the amounts and other disclosures presented in the prior
period; and

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(ii) The accounting policies reflected in the comparative information are consistent with those applied SA 720 The Auditor’s Responsibility in Relation to Other Information in
in the current period or, if there have been changes in accounting policies, whether those changes Documents Containing Audited Financial Statements
have been properly accounted for and adequately presented and disclosed.
Question 1
If the auditor becomes aware of a possible material misstatement in the comparative information while
ING Associates, Chartered Accountants, conducting the audit of XYZ Ltd., a listed Company
performing the current period audit, the auditor shall perform such additional audit procedures as are
for the year ended 31st March 2020 is concerned with the auditor’s responsibilities relating to
necessary in the circumstances to obtain sufficient appropriate audit evidence to determine whether
misstatements in other information, both financial and non-financial, included in the Company’s
a material misstatement exists. If the auditor had audited the prior period’s financial statements, the
annual report. While reading other information, ING Associates considers whether there is
auditor shall also follow the relevant requirements of SA 560 (Revised).
any material misstatement of the other information in the Company. After performing their
As required by SA 580 (Revised), the auditor shall request written representations for all periods procedures, the auditor concludes that a material misstatement of the other information exists.
referred to in the auditor’s opinion. The auditor shall also obtain a specific written representation ING Associates discussed with the Management about the other information that appeared
regarding any prior period item that is separately disclosed in the current year’s statement of profit to be materially misstated to the auditor and also requested management to provide evidence
and loss. for the basis of management’s statements in the other information along with supporting
documents. Guide ING Associates as to how to respond to that material misstatement of other
Multiple Choice Questions (MCQs) information obtained prior to the date of auditor’s report. Will your answer be different in case
ING Associates conclude the same after the date of auditor’s report? (MTP 5 Marks, Oct 20)
Question 1
Answer 1
CA Ram identified that there was a misstatement last year and the same is still not corrected.
Responding When the Auditor Concludes That a Material Misstatement of the Other Information
Although unmodified audit report was issued last year by CA Ram. Guide CA Ram on the audit
Exists: As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the
opinion considering the fact that the last year’s misstatement has been identified in the current
auditor concludes that a material misstatement of the other information exists, the auditor shall request
year and unmodified opinion was issued in the last year?
management to correct the other information. If management:
(a) In accordance with SA 710, CA Ram should give unmodified opinion, but include Other matters
(i) Agrees to make the correction, the auditor shall determine that the correction has been made; or
paragraph in the audit report as last year’s profit is being reflected in reserve and surplus.
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with
(b) In accordance with SA 710, CA Ram should seek legal opinion.
governance and request that the correction be made.
(c) In accordance with SA 710, CA Ram should qualify current period audit report with respect to
If the auditor concludes that a material misstatement exists in other information obtained prior to
corresponding figures only.
the date of the auditor’s report, and the other information is not corrected after communicating
(d) In accordance with SA 710, CA Ram should give unmodified opinion, but last period’s modified with those charged with governance, the auditor shall take appropriate action, including:
opinion should be highlighted in Emphasis of matter paragraph. (MTP 1 Marks, March 21)
(i) Considering the implications for the auditor’s report and communicating with those charged with
Answer 1 : (c). governance about how the auditor plans to address the material misstatement in the auditor’s report;
(ii) Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
If the auditor concludes that a material misstatement exists in other information obtained after
the date of the auditor’s report, the auditor shall:
(i) If the other information is corrected, perform the procedures necessary in the circumstances; or
(ii) If the other information is not corrected after communicating with those charged with governance,
take appropriate action considering the auditor’s legal rights and obligations, to seek to have the
uncorrected material misstatement appropriately brought to the attention of users for whom the
auditor’s report is prepared.
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Question 2 interest rate risks, such as through the use of forward contracts, interest rate swaps, or other financial
ANUSHA Associates, Chartered Accountants, conducting the audit of Rishabh Ltd., a listed instruments.
company for the year ended 31st March 2021 is concerned with the auditor’s responsibilities (iv) Descriptions of the nature of off-balance sheet arrangements.
relating to other information, both financial and non-financial, included in the Company’s (v) Descriptions of guarantees, indemnifications, contractual obligations, litigation or environmental
annual report. While reading other information, ANUSHA Associates considers whether there liability cases, and other contingencies, including management’s qualitative assessments of the entity’s
is a material inconsistency between other information and the financial statements. As a basis related exposures.
for the consideration the auditor shall evaluate their consistency, compare selected amounts or
other items in the other information with such amounts or other items in the financial statements. (vi) Descriptions of changes in legal or regulatory requirements, such as new tax or environmental
Guide ANUSHA Associates with examples of “Amounts” or “other items” that may be included regulations, that have materially impacted the entity’s operations or fiscal position, or will have a
in the “other information” with reference to SA 720. (MTP 5 Marks, April 21, PYP 5 Marks, material impact on the entity’s future financial prospects.
Nov ’19, Old SM) (vii) Management’s qualitative assessments of the impacts of new financial reporting standards that
Answer 2 have come into effect during the period, or will come into effect in the following period, on the entity’s
financial results, financial position and cash flows.
Examples of Amounts or Other Items that May Be Included in the Other Information: As per
SA 720 “The Auditor’s Responsibility in Relation to Other Information”, the following are examples (viii) General descriptions of the business environment and outlook.
of amounts and other items that may be included in other information. This list is not intended to be (ix) Overview of strategy.
exhaustive. (x) Descriptions of trends in market prices of key commodities or raw materials.
Amounts (xi) Contrasts of supply, demand and regulatory circumstances between geographic regions.
(i) Items in a summary of key financial results, such as net income, earnings per share, dividends, (xii) Explanations of specific factors influencing the entity ‘s profitability in specific segments.
sales and other operating revenues, and purchases and operating expenses.
(ii) Selected operating data, such as income from continuing operations by major operating area, or
sales by geographical segment or product line. Question 3
(iii) Special items, such as asset dispositions, litigation provisions, asset impairments, tax adjustments, Jinchandra & Co., Chartered Accountants, have been appointed Statutory Auditors of
environmental remediation provisions, and restructuring and reorganization expenses. Gurudeva Ltd. for the F.Y. 2020-21. The audit team has completed the audit and is in the process
of preparing audit report Management of the company has also prepared draft annual report.
(iv) Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations. Audit in-charge was going through the draft annual report and observed that the company
has included an item in its Annual Report indicating downward trend in market prices of key
(v) Capital expenditures by segment or division.
commodities/raw material as compared to previous year. However, the actual profit margin of
(vi) Amounts involved in, and related financial effects of, off-balance sheet arrangements. the company as reported in financial statements has gone in the reverse direction. Audit Manager
(vii) Amounts involved in guarantees, contractual obligations, legal or environmental claims, and discussed this issue with partner of the firm who in reply said that auditors are not covered with
other contingencies. such disclosures made by the management in its annual report, it being the responsibility of the
management.
(viii) Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio. Some of Do you think that the partner is correct in his approach on this issue?
these may be directly reconcilable to the financial statements. Discuss with reference to relevant Standard on Auditing the Auditor’s duties with regard to
Other Items reporting. (MTP 4 Marks Oct 21)
(i) Explanations of critical accounting estimates and related assumptions. Answer 3
(ii) Identification of related parties and descriptions of transactions with them. Responding When the Auditor Concludes That a Material Misstatement of the Other Information
Exists: As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, descriptions
(iii) Articulation of the entity’s policies or approach to manage commodity, foreign exchange or
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of trends in market prices of key commodities or raw materials is an example of amounts or other for the basis of management’s statements in the other information. Based on management’s further
Items that may be Included in the other information. information or explanations, the auditor may be satisfied that the other information is not materially
The auditor’s discussion with management about a material inconsistency (or other information misstated. For example, management explanations may indicate reasonable and sufficient grounds for
that appears to be materially misstated) may include requesting management to provide support valid differences of judgment.
for the basis of management’s statements in the other information. Based on management’s further Auditor’s duties with regard to reporting: If the auditor concludes that a material misstatement of
information or explanations, the auditor may be satisfied that the other information is not materially the other information exists, the auditor shall request management to correct the other information. If
misstated. For example, management explanations may indicate reasonable and sufficient grounds for management:
valid differences of judgment. (i) Agrees to make the correction, the auditor shall determine that the correction has been made; or
Auditor’s duties with regard to reporting in the given case are given hereunder: (ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with
As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the auditor governance and request that the correction be made.
concludes that a material misstatement of the other information exists, the auditor shall request In the given situation, Sujit & Co., Chartered Accountants, have been appointed as Statutory Auditors
management to correct the other information. If management: of Anand Mills Ltd. The auditor, while reviewing the company’s draft annual report, has observed
(i) Agrees to make the correction, the auditor shall determine that the correction has been made; or a section mentioning about a decline in market prices for essential products compared to previous
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with year and financial statements indicated that company’s profit margin has increased. Considering the
governance and request that the correction be made. requirements of SA 720 as stated above, it can be concluded that contention of firm’s partner, that
auditors are not responsible for disclosures made by management, is not correct. Accordingly, partner
Contention of the partner of the firm that auditors are not concerned with such disclosures made by
is not correct in his approach to this issue.
the management in its annual report, is incorrect.
Question 4
Sujit & Co., Chartered Accountants, have been appointed as Statutory Auditors of Anand Mills
Ltd. for FY 2022-23. The audit team has completed the audit and is in the process of preparing
the audit report. The Management of the company has also prepared a draft annual report.
While reviewing the company’s draft annual report, the auditor observed a section that stated
a decline in market prices for essential products compared to the previous year. Surprisingly,
the financial statements indicated that the company’s profit margin had actually increased. The
audit Man ager discussed this issue with the firm’s partner, who replied that the auditors are
not responsible for disclosures made by management in the annual report. Do you think that the
partner is correct in his approach to this issue? Discuss with reference to the relevant Standards
on Auditing the Auditor’s duties with regard to reporting. (MTP 5 Marks Sep ‘23)
Answer 4
Auditor’s responsibilities as to Other Information included in Annual Report : SA 720, “The
Auditor’s Responsibilities Relating to Other Information”, delineates the responsibilities of auditors in
regard to other information, which can pertain to financial or non-financial matters and is encompassed
within an organization’s annual report. This encompasses documentation of market trends pertaining
to significant products and quantities or other items that may be included in the other information.
The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide support

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Duties of Auditors The law on the subject has hitherto been that,
Question 1 where the consideration for the issue of shares is an

adjustment against a bona fide debt payable in money
Mr. Raj, the engagement partner of R.O.K. & Co., in connection with statutory audit of Waria
on demand by the company, the shares are deemed
Ltd., had assigned the responsibility of enquiring into propriety matters of the Company as
to have been subscribed in cash (vide the decision
required by section 143(1) of the Companies Act, 2013, to Mr. Samay, an engagement team
in Spargo’s Case – 1873, 8, Ch. A. 407). According to
member. Mr. Samay while making such enquiries, was having following queries, as tabulated
the legal opinion obtained by the ICAI, the expression
below, which he ought to get resolved from Mr. Raj, as follows: -
“shares allotted for cash” may also include shares
Sr. No. Query of Mr. Samay allotted against a debt.
What documents to be seen in case of loan given by the company in lieu of hypothecation Therefore, in cases which are covered by the decision
1. of goods from lender as a security for the purpose of reporting as per clause (a) of section in Spargo’s case, no comment is required by the
143(1) of the Companies Act, 2013? auditor, even though the company may have in the
What shall be the cost of Debentures and Bonus Shares sold by the company for which the Return of Allotment under Section 75, shown such
2. cost is not ascertainable for the purpose of reporting as per clause (c) of section 143(1) of shares as allotted against adjustment of a debt. Thus,
the Companies Act, 2013? the shares allotted by Waria Ltd. against a loan taken
by it from a NBFC can be considered to be allotted
Whether the shares allotted by Waria Ltd. against a loan taken by it from a NBFC can be
for cash.
3. considered to be allotted for cash for the purpose of reporting as per clause (f) of section
Whether the shares allotted by Waria Ltd. against a
143(1) of the Companies Act, 2013?
loan taken by it from a NBFC can be considered to
Assuming that you are Mr. Raj the engagement partner, please provide answer to the queries of 3. be allotted for cash for the purpose of reporting as
Mr. Samay? (MTP 6 Marks, March 21) per clause (f) of section 143(1) of the Companies Act,
2013?
S.N. Query of Mr. Samay Response to Query
Question 2
What documents to be seen in case of loan given by the
Mr. Samay should see deed of Hypothecation or other Areas of propriety audit under Section 143(1) of the Companies Act, 2013. (RTP Nov 19)
company in lieu of hypothecation of goods from lender
1. document creating the charge, together with a statement
as a security for the purpose of reporting as per clause Answer 2
of stocks held at the balance sheet date in order.
(a) of section 143(1) of the Companies Act, 2013? Areas of propriety audit under Section 143(1): Section 143(1) of the Companies Act, 2013 requires
For Debentures sold: Where the cost of debentures the auditor to make an enquiry into certain specific areas. In some of the areas, the auditor has to
sold is not ascertainable, the book value thereof at examine the same from propriety angle as to -
the date of sale may be treated as the cost for the (i) whether loans and advances made by the company on the basis of security have been properly
purposes of this clause. secured and whether the terms on which they have been made are prejudicial to the interests of
What shall be the cost of Debentures and Bonus For Bonus Shares sold: When bonus shares are the company or its members;
Shares sold by the company for which the cost is received, the number of shares in the portfolio would
(ii) whether transactions of the company which are represented merely by book entries are prejudicial
2. not ascertainable for the purpose of reporting as per be increased by the bonus shares while the cost of the
to the interests of the company; Again, considering the propriety element, rationalizing the proper
clause (c) of section 143(1) of the Companies Act, total portfolio would remain the same as before. The
disclosure of loans and advance given by company is made;
2013? result would be that the average cost per unit of the
(iii) where the company not being an investment company or a banking company, whether so much
total holding would come down proportionately. The
of the assets of the company as consist of shares, debentures and other securities have been sold
usual accounting practice for apportioning the cost of
at a price less than that at which they were purchased by the company;
a part of the total holding on the sale thereof is to take
it at its average cost. (iv) whether loans and advances made by the company have been shown as deposits;

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(v) whether personal expenses have been charged to revenue account; the loans or advances have been made are prejudicial to the interests of the company or its members.
(vi) where it is stated in the books and documents of the company that any shares have been allotted If it is, he should qualify his report.
for cash, whether cash has actually been received in respect of such allotment, and if no cash has If trade receivables and trade payables are adjusted inter se, this amounts to merely book entries. The
actually been so received, whether the position as stated in the account books and the balance auditor, as per clause (b) of section 143(1), should enquire “whether transactions of the company
sheet is correct, regular and not misleading. which are represented merely by book entries are prejudicial to the interests of the company”. This
A control has been set up to verify the receipt of cash in case of allotment of shares for cash. Further, proposition has got to be inquired into by reference to the effects of the book entries, unsupported
if cash is not received, the books of accounts and statement of affairs shows the true picture. by transactions, on the legitimate interests of the company. The auditor has to exercise his judgment
based on certain objective standards”.
Regarding Personal Expenses, Clause (e) of section 143(1) requires the auditor to inquire:
Question 3 “Whether personal expenses have been charged to revenue account”. The charging to revenue of
CA. G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd., CA. such personal expenses, either on the basis of the company’s contractual obligations, or in accordance
G observed that certain loans and advances were made without proper securities; certain trade with accepted business practice, is perfectly normal and legitimate or does not call for any special
receivables and trade payables were adjusted inter se; and personal expenses were charged to comment by the auditor. Where, however, personal expenses not covered by contractual obligations
revenue. As a company auditor comment on the, reporting responsibilities of CA. G.(PYP 5 or by accepted business practice are incurred by the company and charged to revenue account, it
Marks, Nov ‘19) would be the duty of the auditor to report thereon. It suffices to say that if the auditor finds that
personal expenses have been charged to revenue and if the amounts are material, he should qualify
Answer 3
his report also.
Duty of Auditor to Inquire on certain matters: Section 143(1) of the Companies Act, 2013 requires
the auditor to make an enquiry in respect of specified matters during the course of his audit. Since Multiple Choice Questions (MCQs)
the law requires the auditor to make an enquiry, the Institute opined that the auditor is not required to
report on the matters specified in sub-section (1) unless he has any special comments to make on any Question 1
of the items referred to therein. If the auditor is satisfied as a result of the enquiries, he has no further SBC Private Limited appointed Mr. Vijay, Chartered Accountant as auditor of the company for
duty to report that he is so satisfied. It is to be noted that the auditor is required to make only enquiries the year 2017-18. While verifying the accounts Mr. Vijay noticed that the company has neither
and not investigate into the matters referred to therein. made any provision for accrued gratuity liability nor obtained the actuarial valuation thereon.
The opinion of the Research Committee of the Institute of Chartered Accountants of India on section Mr. Vijay obtained the actuarial valuation and includes the matter in his Audit Report to the
143(1) of the Companies Act, 2013 is worth considering and reproduced below: Company’s Board of Directors mentioning the amount of accrued liability not provided for.
The Board agreed with the auditor’s observation and the amount of liability quantified by him.
“The auditor is not required to report on the matters specified in sub-section (1) unless he has any
But the auditor didn’t disclose the same in his audit report to Member’s. One of the members
special comments to make on any of the items referred to therein. If he is satisfied as a result of the
raised an objection on the audit report stating that it does not represent a true and fair view
inquiries, he has no further duty to report that he is so satisfied. In such a case, the content of the
as even though the company has not maintained proper books of accounts as per accounting
Auditor’s Report will remain exactly the same as the auditor has to inquire and apply his mind to
standards, the auditor has not qualified his report. Whether the auditor is require to give a
the information elicited by the enquiry, in deciding whether or not any reference needs to be made
qualified opinion in his report to members on non-provision of gratuity in company’s accounts
in his report. In our opinion, it is in this light that the auditor has to consider his duties under section
when the same has already been included in the report to Company’s Board of Directors? (MTP
143(1).” Clause (a) of Section 143(1) requires the auditor to inquire: “Whether loans and advances
2 Marks, April 19)
made by the company on the basis of security have been properly secured and whether the terms on
which they have been made are prejudicial to the interests of the company or its members”. (a) As the auditor has already disclosed the matter of non-provisioning in his report to Company’s
Board of Directors, there is no need to disclose the same in report to Member’s u/s 143 of the
If the auditor finds that the loans and advances have not been properly secured, he may enter an
Companies Act, 2013.
adverse comment in the report but cannot probably doubt the true view of the accounts by reference
to this fact so long the loans and advances are properly described and presented in terms of Part I of (b) Non-provisioning for accruing gratuity is in contravention to applicable Accounting Standard
Schedule III to the Companies Act. Further the auditor to inquire whether or not the terms on which (AS- 15), therefore the auditor should qualify his report to members through a paragraph on
failure of management to quantify the amount of liability.
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(c) The auditor should revise the accounts as per the actuarial valuation obtained by him and the CARO
revised accounts only should be presented before the Board of Directors and Members. The Question 1
auditor is not required to qualify his report.
Whilst the Audit team has identified various matters, they need your advice to include the same
(d) U/s 143 of the Companies Act, 2013, the auditor should qualify his report to members only when in your audit report in view of CARO 2016 (CARO 2020):-
the matter reported by the auditor is answered in the negative or with a qualification by the Board.
Physical verification of only 40% of items of inventory has been conducted bythe company. The
In the above case the board agreed with the auditor’s observation so he need not qualify his report. balance 60% will be conducted in next year due to lack of time and resources. (MTP 2 Marks
Ans: (d) Oct’19, Old SM)
Answer 1
Question 2 Physical Verification of Inventory: Clause (ii) of Para 3 of CARO, 2016(CARO 2020) requires
the auditor to report on whether physical verification of inventory has been conducted at reasonable
NIC Chartered Accountants was appointed as statutory auditors by PNG Ltd. for the audit of
intervals by the management and (whether the opinion of the Auditor, the coverage and the procedure
their financial statements. During the course of audit the auditors noticed a fraud of ₹ 101 lac
of such verification by the management is appropriate, whether any discrepancies of 10% or more in
committed by an officer of the Company. The officer sanctioned and made the payment to fake
the aggregate for each class of inventory was noticed and if so, whether it has been properly dealt with
vendors for purchase of fixed assets, however, the assets were not entered in the Fixed Assets
in books of accounts.) Added in CARO 2020. Physical verification of inventory is the responsibility
Register. The auditor reported the fraud in his audit report to the shareholders of the Company
of the management which should normally verify all material items at least once in a year and more
presented in the Annual General Meeting, but did not mention the name of the parties involved.
often in appropriate cases. The auditor in order to satisfy himself about verification at reasonable
The Board of Directors of the Company asked ICAI to take necessary action against the auditor
intervals should examine the adequacy of evidence and record of verification. In the given case, the
as he did not comply with his duty to report fraud as per Section 143(12) of the Companies Act,
above requirement of CARO, 2016 (CARO 2020) has not been fulfilled as such and the auditor should
2013. What is the duty of the auditor as per the Companies Act, 2013 in reporting the fraud
point out the specific areas where he believes the procedure of inventory verification is not reasonable.
committed by officers / employees of the Company?
He may consider the impact on financial statement and report accordingly.
(a) As per the Companies Act, 2013, since the amount of fraud is more than ₹ 100 lac; the auditor
should have reported the matter within 2 days of his knowledge to the Board of Directors/ Audit
committee of the Company seeking their reply or observations within 45 days. After completion Question 2
of 45 days, the auditor should forward his report to the Central Government along with the reply, Rishabh Finance Ltd. is a Non-Banking Finance Company and was in the business of accepting
if any, received from Board/ Audit Committee. public deposits and giving loans since 2015. The company was having net owned funds of ₹
(b) As per the Companies Act, 2013, during the course of audit if the auditor has reason to believe 1,50,00,000/- (one crore fifty lakh) and was not having registration certificate from RBI and
that a fraud has been committed by the officers or employees of the Company, the auditor shall applied for it on 30th March 2020. The company appointed Mr. Gautam as its statutory auditors
report the matter to the Central Government immediately. for the year 2019-20.
(c) The auditor’s duty is restricted to reporting the fraud to shareholders and he is not required to Advise the auditor with reference to auditor procedures to be taken and reporting requirements
report the matter to the Board of Directors/ Audit Committee/ Central Government. on the same in view of CARO 2016 (CARO 2020)? (MTP 6 Marks Oct 21, Mar’19)
(d) The auditor can submit his report on fraud to shareholders but is required to mention the name of Answer 2
the parties involved in fraud, as per Section 143(12) of the Companies Act, 2013. (RTP Nov 20, As per Clause (xvi) of Paragraph 3 of CARO 2016(CARO 2020) , the auditor is required to report that
MTP 1 Mark Apr’19)
(a) “whether the company is required to be registered under section 45-IA of the Reserve Bank of
Ans: (a) India Act, 1934 and if so, whether the registration has been obtained.
(b) “whether any non-banking financial or housing finance activities without a valid certificate of
registration from RBI has been made.
(c) Whether the company is a Core Investment Company (CIC) if yes, whether it fulfills the criteria
of CIC.
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(d) Whether the group has more than 1 CIC as part of the group, if yes, then indicate the numbers of has been made in the notes forming part of the accounts highlighting the same as a ‘related
CIC’s (As per CARO 2020) party’ transaction. (MTP 2 Marks Nov 21, MTP 3 Marks, Oct 19, RTP May’19)
The auditor is required to examine whether the company is engaged in the business which attract the Answer 3
requirements of the registration. The registration is required where the financing activity is a principal (i) As per clause (xiii) of para 3 of CARO 2016 (CARO 2020) the auditor is required to report,
business of the company. The RBI restrict companies from carrying on the business of a non banking “whether all transactions with the related parties are in compliance with sections 177 and 188
financial institution without obtaining the certificate of registration. of Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Audit Procedures and Reporting: Statements etc., as required by the applicable accounting standards”.
(i) The auditor should examine the transactions of the company with relation to the activities covered In the present case, the auditor is required to report as per clause xiii of para 3 of CARO 2016 (CARO
under the RBI Act and directions related to the Non-Banking Financial Companies. 2020) regarding receipt of long term borrowing from Parent Company which qualifies as a transaction
(ii) The financial statements should be examined to ascertain whether company’s financial assets with the related party.
constitute more than 50 per cent of the total assets and income from financial assets constitute (ii) As per clause (xiii) of para 3 of CARO 2016 (CARO 2020), the auditor is required to report,
more than 50 per cent of the gross income. “whether all transactions with the related parties are in compliance with sections 177 and 188
(iii) Whether the company has net owned funds as required for the registration as NBFC. of Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards;”
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons should be sought
from the management and documented. Therefore, the duty of the auditor, under this clause is to report (i) Whether all transactions with the
related parties are in compliance with section 177 and 188 of the Companies Act, 2013 (“Act”); (ii)
(v) The auditor should report incorporating the following:- Whether related party disclosures as required by relevant Accounting Standards (AS 18, as may be
(1) Whether the registration is required under section 45-IA of the RBI Act, 1934. applicable) are disclosed in the financial statements. In the present case, the auditor is required to
(2) If so, whether it has obtained the registration. report as per clause xiii of para 3 of CARO 2016 (CARO 2020), as one of related party transaction
amounting ₹ 2.35 lakhs per month i.e. in lieu of marketing services has been noticed of which amount
(3) If the registration not obtained, reasons thereof.
₹ 0.35 lakh per month is exceeding the arm’s length price has not been disclosed highlighting the same
In the instant case Rishabh Finance Ltd. is a Non Banking Finance Company and was in the business as related party transactions as per AS 18. Thus, the auditor is required to report accordingly.
of accepting public deposits and giving loans since 2015. The company was having net owned funds
of ₹ 1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the prescribed limit i.e. 2 crore
rupees and was also not having registration certificate from RBI (though applied for it on 30th March Question 4
2020). The auditor is required to report on the same as per Clause (xvi) of Paragraph 3 of CARO 2016 Whilst the Audit team has identified various matters, they need your advice to include the same
(CARO 2020). in your audit report in view of CARO 2016 (CARO 2020): -
(i) The Company is in the process of selling its office along with the freehold land available at
Question 3 Pune and is actively on the lookout for potential buyers. Whilst the same was purchased at ₹ 20
Lakh in 2006, the current market value is ₹ 200 Lakh. This property is pending to be registered
Whilst the Audit team has identified various matters, they need your advice to include the same
in the name of the Company, due to certain procedural issues associated with the Registration
in your audit report in view of CARO 2016 (CARO 2020):-
though the Company is having a valid possession and has paid its purchase cost in full. The
(i) The long term borrowings from the parent has no agreed terms and neither the interest nor Company has disclosed this amount under Fixed Assets though no disclosure of non-registration
the principal has been repaid so far. (MTP 2 Marks Nov’21, Mar’19, RTP May’19) is made in the notes forming part of the accounts. (MTP 2 Marks Oct’21, RTP May’19)
(ii) An amount of ₹ 2.35 Lakh per month is paid to M/s. RARE Associates, a partnership firm, (ii) The Internal Auditor of the Company has identified a fraud in the recruitment of employees
which is a ‘related party’ in accordance with the provisions of the Companies Act, 2013 for the by the HR department wherein certain sums were alleged to have been taken as kick -back
marketing services rendered by them. Based on an independent assessment, the consideration from the employees for taking them on board with the Company. After due investigation, the
paid is higher than the arm’s length pricing by ₹ 0.35 Lakh per month. Whilst the transaction concerned HR Manager was sacked. The amount of such kickbacks is expected to be in the
was accounted in the financial statements based on the amounts’ paid, no separate disclosure range of ₹13.50 Lakh. (MTP 2 Marks Oct 21, MTP 2.5 Marks Mar’19, RTP May’19)
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Answer 4 rupees approx. 13.50 lakh. The auditor is required to report on the same in accordance with clause
(i) As per clause (i) (c) of para 3 of CARO 2016 (CARO 2020) the auditor is required to report, (x)(xi) of para 3 of CARO 2016 (CARO 2020).
“whether the title deeds of immovable properties are held in the name of the company (other than
properties where the company is the lessee and the lease agreements are duly executed in the favor
Question 5
of the lessee). If not, provide the details thereof in the following format below.”
Stone Private Limited was engaged in business of manufacture of Cycles. CA. Chandra was
In the present case, the Company has office along with freehold land in Pune. Though company has
appointed as a Statutory Auditor of the Company for the financial year 2021 -22. Outing the
paid its purchase cost in full however, this property is pending to be registered in the name of the
year under audit, Stone Private Limited obtained working capital facilities from Royal Bank
company i.e. title deed is not in the name of Company since 2006. Therefore, the auditor is required
Limited for ₹ 10 crore hypothecating the Stock of goods as primary security. On inquiry CA.
to report the same in accordance with clause (i)(c) of para 3 of CARO 2016 (CARO 2020).
Chandra was informed by management that stock statements are furnished periodically to
The reporting under this clause, where the title deeds of the immovable property are not held in Royal Bank Limited and the details of submission of quarterly stock statement are as follows:
the name of the Company, may be made incorporating following details, in the form of a table or
otherwise in case of land:- Stock Value as per quarterly
Stock Value as per Books of Account
statement submitted to Royal Bank
• total number of cases, Period of Stock as at the end of the quarter (₹ in
Limited as at the end of quarter (₹
• whether leasehold / freehold, crore)
in crore)
• gross block and net block, (as at Balance Sheet date), and Q1-2021-22 21.50 24.00
• remarks, if any. Q2-2021-22 24.75 27.00
The reporting under this clause, in the form of a table- Q3-2021-22 21.50 24.00
• Description of Property Q4-2021-22 25.25 25.25
• Gross Carrying Value The management of Stone Private Limited did not disclose the above variations in Notes
• Held in Name of to accounts forming part financial Statements of the Company for the year 2021 -22. The
management replied that there are no variations as on the Balance sheet date and further
• Whether promoter, director, relative or employee they are of the view that stock statement furnished to bank is only a formality and computed
• Period held-indicate range where appropriate arbitrarily only for the purpose of securing higher drawing power and hence statutory auditors
• Reason for not being held in name of company (Also indicate if in dispute) need not be bothered.
(AS per CARO 2020) Is the contention of the management valid? As a statutory auditor how CA. Chandra should deal
with the same and discuss the disclosure/reporting requirements if any, as per the Companies
(ii) As per clause Clause (x)(xi)(As per CARO 2020) of para 3 of CARO 2016 (CARO 2020) the
Act, 2013 and CARO, 2020. (MTP 5 Marks March ’23, PYP 5 Marks May ’22)
auditor is required to report,
Answer 5
(a) “whether any fraud by the company or any fraud on the Company by its officers or employees
has been noticed or reported during the year; If yes, the nature and the amount involved is to be As per clause (vii) of point Y of Schedule III to the Companies Act, 2013 - Division I - Financial
indicated.” Statements for a company whose financial statements are required to comply with the Companies
(Accounting Standard) Rules, 2006, “where the company has borrowings from banks or financial
(b) Whether any report under 143(12) of the Companies Act has been filed by the Auditors in form
institutions on the basis of security of current assets, it shall disclose the following :
ADT-4 as prescribed under rule 13 of Companies (Audit & Auditor) Rules, 2014 with the Central
Government. (a) whether quarterly returns or statements of current assets filed by the company with banks or
financial institutions are in agreement with the books of accounts.
(c) Whether the auditor has considered whistle blower complaints if any received during the year In
the instant case, a fraud has been identified in recruitment of employees by the HR Department (b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately
wherein certain sums were alleged to have been taken as kickback from the company of amounting disclosed.

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Further, as per para 3(ii) (b) of CARO 2020, the auditor is required to report whether during any
Sr. No. Observations
point of time of the year, the company has been sanctioned working capital limits in excess of five
crore rupees, in aggregate, from banks or financial institutions on the basis of security of current One of the Plant and Equipment taken on a lease (‘right of use’ asset) by Sinwar Ltd. was
assets; whether the quarterly returns or statements filed by the company with such banks or financial a. revalued based on the valuation by a registered valuer and the net carrying value of Plant
institutions are in agreement with the books of account of the Company, if not, give details. and Equipment in aggregate was changed from ₹ 4 crore to ₹ 4.45 crore.
The above clause requires CA Chandra to comment on whether during any point of time of the year, During the year under consideration, cash credit limit of ₹ 5.5 crore was sanctioned to
the company has been sanctioned working capital limits in excess of ₹ 5 crores in aggregate. Stone (P) Sinwar Ltd. by DMC Bank based on the security of current assets which was reduced
b.
Ltd. has been sanctioned working capital facilities/limit of ₹ 10 crores which is apparently in excess to ₹ 4.5 crore after 6 months. In this connection, quarterly returns have been filed by the
of ₹ 5 crores. company with the DMC bank which are in agreement with Books of Accounts.
Secondly, whether the quarterly returns filed by the Stone (P) Ltd. company with Royal Bank Ltd. are You are required to examine the contention of Mr. Brijesh regarding reporting of the above
in agreement with the book of accounts of the company. observations in accordance with CARO 2020. (RTP May 22)
According to the data given in the instant situation, it is clear that there are variations in Quarter 1, Answer 6
Quarter 2 & Quarter 3 requiring reporting under this clause because of difference in stock value as per Matters to be reported by Mr. Brijesh as per CARO, 2020 are as follows:-
Book of Accounts & Stock Value as per Quarterly returns submitted to Royal Bank Ltd.
(a) According to Clause (i) (d) of Para 3 of CARO 2020, the auditor is required to report whether the
Therefore, Contention of the management is not valid. company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible
CA. Chandra should report the differences as per the Companies Act, 2013 and CARO 2020 as follows: assets or both during the year and, if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if the change is 10% or more in the aggregate of the
Stock value as per Book Stock value as per quarterly Variation net carrying value of each class of Property, Plant and Equipment or intangible assets;
Accounts (₹ in Crore) statement Submitted to
In the given situation, Sinwar Ltd. has revalued one of the Plant and Equipment taken on a lease (‘right
Royal Bank Ltd. (₹ in
of use’ asset) based on the valuation by a registered valuer. The amount of change in the value of such
Crore)
Plant and Equipment is ₹ 45 lakh. As the net carrying value of Plant and Equipment in aggregate was
Excess reporting of stock to
Q-1 21.50 24.00 changed from ₹ 4 crore to ₹ 4.45 crore i.e. change was 10% or more.
Bank by 2.50 crore
Excess reporting of stock to Thus, the auditor is required to report the amount of change of ₹ 45 lakh in accordance with Clause
Q-2 24.75 27.00
Bank by 2.25 Crore (i) (d) of Para 3 of CARO 2020.
Excess reporting of stock to (b) As per Clause (ii) (b) of Para 3 of CARO 2020, the auditor is required to report whether during
Q-3 21.50 24.00
bank by 2.50 crore any point of time of the year, the company has been sanctioned working capital limits in excess of
five crore rupees, in aggregate, from banks or financial institutio ns on the basis of security of current
Question 6 assets; whether the quarterly returns or statements filed by the company with such banks or financial
Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a Chartered institutions are in agreement with the books of account of the Company, if not, give details;
Accountant Firm, for conducting statutory audit assignment of Sinwar Ltd., unlisted public In the instant case, Sinwar Ltd. has been sanctioned a cash credit limit of ₹ 5.5 crore by DMC Bank
company. Mr. Brijesh, one of the senior engagement team members, was given the responsibility during the year under consideration, which is exceeding the prescribed limit of ₹ 5 crore based on
to audit the matters as per the requirements of CARO, 2020 and in that connection, he made the the security of current assets. Further, quarterly returns have also been filed by the company with the
following observations, that may be relevant for reporting as per the said Order:- DMC bank in this connection which is in agreement with Books of Accounts. In view of the above,
the auditor is required to report the same in accordance with Clause (ii) (b) of Para 3 of CARO 2020

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Question 7 whether the company has defaulted in repayment of loans or other borrowings or in the payment of
Gautam Limited had borrowed ₹ 1000 crore from XYZ Bank, the principal of which was interest thereon to any lender, if yes, then provide the details of the period and the amount of default.
repayable after 5 years and interest was payable at the end of each year. For 4 years, Gautam Also, the auditor needs to consider the impact of such non-disclosure and the non-compliance with
Limited paid the interest amount on time. Gautam Limited defaulted the 5th instalment of the financial reporting framework and accordingly the auditor needs to either issue a qualified opinion
interest payment and principal which was due on June 30, 2021. On March 31, 2021, Gautam or an adverse opinion as per SA 705, “Modifications to the Opinion in the Independent Auditor’s
Limited approached XYZ bank and MNO bank to restructure the existing liability. As a result, Report”.
the existing principal and outstanding and overdue interest was restructured into a new loan
amounting to ₹ 1,100 crore. The management did not provide any disclosure for the default
on the loan on the belief that the old loan ceased to exist and the new loan has maturity after 5 Question 8
years. LIU Private Limited is a company based out of Mumbai. The company had an authorised
During the statutory audit for the financial year 2021-22, KP & Co. identified this transaction capital of ₹ 200 lakh and paid-up capital plus reserves of ₹ 95 lakh as of 31st March. During the
and obtained the relevant documents and understanding. Based on the underlying documents, it audit for the year ended 31st March 202X, the auditor M/s Y&S Associates noted the following
was identified that the said restructuring agreement was approved and signed on April 8, 2022, points:
by both of the banks. As a result, on March 31, 2022, the restructuring was still not approved. (i) On 15th December, the company had total bank borrowings of ₹ 75 lakh. On the said date,
In the light of the above scenario, kindly guide the statutory auditors in the reporting of this the company received a new loan of ₹ 30 lakh for a new project that was to be developed.
transaction. .(RTP Nov’22) However, the project was shelved on 17th December due to technical reasons, and the whole
loan was paid on the same date.
Answer 7
(ii) During the financial year, a new proceeding was initiated against the company for holding
As per Clause 3(ix) of CARO 2020, the auditor is required to report whether the company has defaulted
a benami property worth ₹ 2.5 crore. However, the company’s legal team had advised that
in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes,
the case would not withstand the law and would be dismissed during the hearing in April of
the period and the amount of default to be reported as per the format below.
next financial year.
Nature of (iii) The company had incurred a cash loss of ₹ 39 lakh during the financial year compared to
borrowing, Amount not Whether No. of days a cash profit of ₹ 15 lakh in the previous financial year. The total turnover of the company
Name of Remarks, if
including paid on due principal or delay or for the financial year was ₹ 45 Crore.
lender any
debt date interest unpaid During the year, the Y&S Associates had offered to resign from acting as the company’s auditors.
securities However, they later decided to postpone their resignation to the following year. At the conclusion
lender wise
of the audit, there was a difference of opinion between two articled assistants (Jack & Jill),
details to be
who were assigned to the engagement, concerning disclosing the points mentioned above in the
provided in case
Companies (Auditor’s Report) Order 2020. Jack was of the opinion that the proceeding initiated
of defaults to
under Benami Property Act need not be disclosed since the expert legal team had informed
banks, financial
them that the case would not withstand the law. However, he insisted that the cash loss shall be
institutions and
disclosed along with the amount. Jill was of the opinion that CARO is not at all applicable to the
Government.
company, hence nothing needs to be reported. They both approached the firm’s partners (Mr.
In the given case, the company Gautam Limited defaulted in payment of the principal amount of the Y & Mr. S) to resolve their argument.
loan due of ₹ 1000 crore on 30 June 2021 and the interest instalment of₹ 100 crore. The said default
Mr Y supported Jack’s viewpoint & Mr S supported Jill’s viewpoint. Now, both partners
continued till the end of the year and on 8 April 2022, a restructuring agreement was signed by the
approached their Senior Partner to get clarification on the same. As a Senior Partner, kindly
banks and company for re-structuring the outstanding loan. Moreover, no disclosure was provided by
clarify the correct disclosure requirement. (RTP May ’23)
the company with respect to the said matter.
Hence the auditor is required to report the same matter under Clause (ix) of Para 3 of CARO 2020, i.e.,

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Answer 8 In the given situation, the company incurred a cash loss of ₹ 39 lakh during the financial year.
As per para 1 of Companies (Auditor’s Report) Order 2020, CARO 2020 is applicable to every Hence, a cash loss of ₹ 39 lakh during the financial year need to be reported as per clause (xvii) of
company, including a foreign company, as defined in clause (42) of section 2 of the Companies Act para 3 of CARO 2020.
2013, except, (iii) As per clause (xviii) of para 3 of CARO 2020, the auditor shall include a statement on whether
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 there has been any resignation of the statutory auditors during the year, if so, whether the auditor
of 1949); has taken into consideration the issues, objections or concerns raised by the outgoing auditors.
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938); In the instant case, there has been no resignation made by the statutory auditors during the financial
(iii) A company licensed to operate under section 8 of the Companies Act; year. The mere fact that Y&S Associates were thinking of resigning does not matter in the current
scenario, and hence this clause shall not be applicable in the given situation.
(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and a
small company as defined under clause (85) of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public company, Question 9
having a paid up capital and reserves and surplus not more than rupees one crore as on the balance CA. F has been appointed as the Statutory Auditor of XYZ Limited for the financial year 2022-
sheet date and which does not have total borrowings exceeding rupees one crore from any bank 23. XYZ Limited has one subsidiary, namely AT Private Limited, whose statutory auditor is
or financial institution at any point of time during the financial year and which does not have a CA. B for the same financial year i.e., 2022-23.
total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from
CA. B issued a qualification in CARO 2020 for AT Private Limited, stating that short -term
discontinuing operations) exceeding rupees ten crore during the financial year as per the financial
funds raised were utilised for long-term purposes. When consolidating the financial statements,
statements.
CA. F decided to include the aforementioned qualification in the audit report of the Consolidated
In the given case, though LIU is a private company, and its paid-up capital is less than ₹ 1 crore as Financial Statements for the financial year 2022 -23. The management of XYZ Limited argued
on the balance sheet date, it is to be noted that for the period 15 th December to 17th December, the that CA. F is not obligated to take into account and report the qualification given by CA. B
total borrowings of the company had exceeded ₹ 1 crore (75 lakh + 30 lakh). The borrowings are less in the audit report of the subsidiary company in the consolidated financial statements for the
than ₹ 1 crore as of the balance sheet date and the authorized capital is ₹ 200 lakh, are irrelevant to the financial year 2022 -23.
current scenario. Also, the turnover of the company was greater than ₹ 40 crore. Hence, CARO 2020
Discuss the reporting requirement as per CARO, 2020.(RTP Nov ’23)
is applicable to LIU Private Limited.
Answer 9
(i) As per clause (i) (e) of para 3 of CARO 2020, the auditor shall include a statement on: whether
any proceedings have been initiated or pending against the company for holding any benami XYZ Limited is the parent company, and it has a subsidiary named AT Private Limited. CA F is the
property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made appointed statutory auditor for XYZ Limited for the financial year 2022 -23. Another auditor, CA
thereunder, if so, whether the company has appropriately disclosed the details in its financial B, has conducted the statutory audit for AT Private Limited and issued a CARO 2020 report, which
statements. includes a qualification regarding the short-term funds raised and utilised for long-term purposes.
In the given situation, a new proceeding was initiated against the company for holding a benami Provision of Paragraph 2 of CARO 2020: Paragraph 2 of CARO 2020 specifies that the CARO
property worth ₹ 2.5 crores during the financial year. However, the company’s legal team had advised provisions do not apply to the auditor’s report on consolidated financial statements except for clause
that the case would not withstand the law and would be dismissed during the hearing, which would be (xxi) of Paragraph 3.
held in April of the next financial year. Clause (xxi) of Paragraph 3 of CARO 2020: Clause (xxi) of Paragraph 3 of CARO 2020 mandates the
Therefore, the above observation of a new proceeding initiated against the company for holding a auditor to comment on whether there are any qualifications or adverse remarks in the CARO reports of
benami property worth ₹ 2.5 crores need to be disclosed as per clause (e) of para 3 of CARO 2020. companies included in the consolidated financial statements. If such qualifications or adverse remarks
exist, the auditor is required to provide details of the companies and the paragraph numbers of the
(ii) As per clause (xvii) of para 3 of CARO 2020, the auditor shall include a statement on whether the
CARO report containing those qualifications or adverse remarks.
company has incurred cash losses in the financial year and in the immediately preceding financial
year, if so, state the amount of cash losses. CA F’s Responsibility: Considering the provisions stated above, CA F, as the auditor of XYZ Limited’s
consolidated financial statements, is required to follow these steps:
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a. Report under Clause (xxi) of Paragraph 3 of CARO 2020: CA F must include a comment in (c) Reporting whether term loans were applied for the purpose intended.
the consolidated financial statement’s audit report regarding whether there are any qualifications (d) Reporting whether funds raised for short term have been utilized for long term purpose, if yes,
or adverse remarks in the CARO reports of the companies included in the consolidated financial then amount and nature of the same.
statements.
(e) Reporting on whether the company has taken any funds from any entity or person on account of or
b. Incorporate Qualification by CA B: CA F should incorporate the qualification made by CA B to meet obligations of its subsidiaries, joint ventures or associates, if yes, then amount and nature
(regarding short-term funds raised and utilized for long-term purposes in AT Private Limited) into of the same.
the auditor’s report for XYZ Limited’s consolidated financial statements.
(f) Reporting on whether the company has raised loans on the pledge of securities held in its
c. Mention Paragraph Number: CA F must also provide the paragraph number of CA B’s CARO subsidiaries, joint ventures and associates, if yes, then give details and also report any default in
report where the qualification is stated. repayment, if any.
Management’s Contention: The management of XYZ Limited’s contention that CA F is not required In the given case, C Ltd. has defaulted in repayments of dues to a financial institution during the
to consider and report CA B’s qualification in the subsidiary’s CARO report for the consolidated financial year 2016-17 which remain outstanding as at March 31, 2017. However, the company has
financial statements is not valid. As per the provisions, CA F is indeed required to report such settled the total outstanding dues including interest in April, 2017 but, the dues were outstanding as at
qualifications as specified in Clause (xxi) of Paragraph 3 of CARO 2020. March 31, 2017. Therefore, it needs to be reported in the notes to accounts.
In conclusion, based on the information provided and the provisions of CARO 2020, CA F is obligated The draft report for above matter is as under:
to incorporate the qualification from CA B’s CARO report for AT Private Limited into the auditor’s
“The company has taken a loan during the year, from a financial institution amounting to Rs.XXXX
report for XYZ Limited’s consolidated financial statements for the financial year 2022-23, as well as
@ X% p.a. which is repayable by monthly installment of Rs.XXXX for XX months.
provide the necessary details as per the requirements of Clause (xxi) of Paragraph 3 of CARO 2020.
The company has defaulted in repayment of dues including interest to a financial institution during the
financial year 2015-16 amounting to Rs.XXXX which remained outstanding as at March 31, 2017.
Question 10 The period of default is XXX days. However, the outstanding sum was settled by the company in
C Limited has defaulted in repayment of dues to a financial institution during the financial April, 2017.”
year 2016- 17 and the same remained outstanding as at March 31, 2017. However, the Company
settled the total outstanding dues including interest in April, 2017 subsequent to the year end
Question 11
and before completion of the audit. Discuss how you would deal with this matter and draft a
suitable Auditor’s Report. (RTP May 18) Under CARO, 2016 (2020), as a statutory auditor, how would you report?
Answer 10 (i) RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son of director, which is an
arrangement by which the RPS Ltd. is in process to acquire assets for consideration other than
Reporting for Default in Repayment of Dues: As per the general instructions for preparation of
cash.
Balance Sheet, provided under Schedule III to the Companies Act, 2013, terms of repayment of term
loans and other loans is required to be disclosed in the notes to accounts. It also requires specifying (ii) NSP Limited has its factory building, appearing as fixed assets in its financial statements in
the period and amount of continuing default as on the balance sheet date in repayment of loans and the name of one of its director who was overlooking the manufacturing activities. (RTP Nov 19)
interest, separately in each case. Answer 11
Further, as per clause (viii) (ix) (As per CARO 2020) of Para 3 of CARO, 2016 (CARO 2020), (a)
(a) the auditor of a company has to state in his report whether the Company has defaulted in repayment (i) Non-cash Transactions with Relative of Director: As per Clause (xv) of paragraph 3 of CARO,
of dues to a financial institution or bank or debentures holders and if yes, the period and amount 2016 (CARO 2020), the auditor is required to report “whether the company has entered into any non-
of default to be reported. cash transactions with directors or persons connected with him and if so, whether the provisions of
(b) Reporting whether company is declared willful defaulter by any bank or financial institution or section 192 of Companies Act, 2013 have been complied with”.
other lender. Section 192 of the said Act deals with restriction on non-cash transactions involving directors or
persons connected with them. The section prohibits the company from entering into such types of
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arrangements unless it is an arrangement by which the company acquires or is to acquire assets for • Held in Name of
consideration other than cash, from such director or person so connected. • Whether promoter, director, relative or employee
In the instant case, RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son of director • Period held-indicate range where appropriate
which is an arrangement by which RPS Ltd. is in process to acquire assets for consideration other than
• Reason for not being held in name of company (Also indicate if in dispute)
cash. In the above situation the provisions of section 192 of Companies Act, 2013 have been complied
with. (AS per CARO 2020)
However, the reporting requirements under this clause are given in two parts. The first part requires
the auditor to report on whether the company has entered into any non-cash transactions with the
Question 12
directors or any persons connected with such director/s. The second part of the clause requires the
auditor to report whether the provisions of section 192 of the Act have been complied with. ABC & Associates are conducting audit of consolidated financial statements of “Crazy Paints
Limited” for year 2022-23. The consolidated financial statements consist of financial statements
Therefore, the second part of the clause becomes reportable only if the answer to the first part is in
of parent company and its five subsidiaries (audited by component auditors). While drafting
affirmative. In the given situation, RPS Ltd. has entered into non-cash transactions with Mr. Rahul,
audit report in respect of consolidated financial statements under Companies Act, 2013, how
son of director which is affirmative answer to the first part of the Clause (xv) of Paragraph 3 of CARO,
firm should proceed to deal with issue of reporting under CARO, 2020? (MTP 4 Marks Oct ‘23)
2016 (CARO 2020), thus, reporting is required for the same. Draft report is given below.
Answer 12
According to the information and explanations given to us, the Company has entered into non-cash
transactions with Mr. Rahul, son of one of the directors during the year, for the acquisition of assets, CARO, 2020 specifically provides that it shall not apply to the auditor’s report on consolidated
which in our opinion is covered under the provisions of Section 192 of the Companies Act, 2013. financial statements except clause (xxi) of paragraph 3. This means that the auditor will need to give a
CARO report on the consolidated financial statements with respect to clause 3(xxi) of the Order only.
(ii) Title deeds of Immovable Property in the name of Director:
Thus, the auditor is not required to report on rest of the clauses of paragraph 3.
As per clause (i) (c) of para 3 of CARO 2016 (CARO 2020) the auditor is required to report, “whether
Clause 3(xxi) of CARO 2020 requires the auditor to state whether there have been any qualifications or
the title deeds of immovable properties are held in the name of the company (other than properties
adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of
where the company is the lessee and the lease agreements are duly executed in the favor of the lessee).
the companies included in the consolidated financial statements. If yes, indicate the details of the companies
If not, provide the details thereof in the following format below.”
and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.
In the present case, the Company has office along with freehold land in Pune. Though company has
Therefore, it requires the auditor to provide details of the companies and the paragraph numbers of the
paid its purchase cost in full however, this property is pending to be registered in the name of the
respective CARO report containing the qualifications or adverse remarks only. Reporting under this
company i.e. title deed is not in the name of Company since 2006. Therefore, the auditor is required
is only required for those entities included in the consolidated financial statements to whom CARO
to report the same in accordance with clause (i)(c) of para 3 of CARO 2016 (CARO 2020).
2020 is applicable.
The reporting under this clause, where the title deeds of the immovable property are not held in
the name of the Company, may be made incorporating following details, in the form of a table or
otherwise in case of land:- Question 13
• total number of cases, The Property, Plant and Equipment of ABC Ltd. included ₹ 25.75 crores of earth removing
machines of outdated technology which had been retired from active use and had been kept for
• whether leasehold / freehold,
disposal after knock down. These assets appeared at residual value and had been last inspected
• gross block and net block, (as at Balance Sheet date), and ten years back. As an Auditor, what may be your reporting concern as regards matters specified
• remarks, if any. above? (PYP 5 Marks, May ’18, MTP 4 Marks, May’20 & April 21)
The reporting under this clause, in the form of a table- Answer 13
• Description of Property Disclosure in Audit Report: The auditor is required to specifically include certain matters as per
CARO, 2016 (CARO 2020) under section 143 of the Companies Act, 2013.
• Gross Carrying Value

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According to clause (i) (a) of CARO, 2016 (CARO 2020) the auditor has to comment whether the exceeding the specified limits of rupees 1 crore. Hence CARO, 2016 (CARO 2020). will be applicable
company is maintaining proper records showing full particulars, including quantitative details and to LM Pvt. Ltd.
situation of fixed assets (Property, Plant & Equipment) and whether the company is maintaining As per clause (ix) of Para 3 of CARO, 2016 (CARO 2020),
proper records showing full particulars of intangible Assets ; and as per clause (i) (b) whether these
(a) an auditor need to state in his report that whether the term loans were applied for the purpose for
fixed assets (Property, Plant & Equipment and Intangible Assets) have been physically verified by
which the loans were obtained. If not, the details together with delays or default and subsequent
the management at reasonable intervals; whether any material discrepancies were noticed on such
rectification, if any, as may be applicable, be reported.
verification and if so, whether the same have been properly dealt with in the books of account;
In a specific format in the form of a table as follows:
In the given case, ABC Ltd. has intention to sale its earth removing machines of outdated technology
which had been retired from active use and had been kept for disposal after knock down and these • Nature of borrowings including debt securities
assets are appearing at residual value. Further, inspection of such machines (though it is a retired • Name of Lender (Lender wise details to be provided in case of defaults to banks, financial
machine, however value is ₹ 25.75 crores which is material amount) was done 10 years back, is not institutions and Government)
in compliance with CARO, 2016 (CARO 2020).
• Amount not paid on due date
Hence, this fact needs to be disclosed in the Audit Report as per clause (i) (a) and (b) of Paragraph 3
• Whether principal or interest
of CARO 2016(CARO 2020).
• No. of days delay or unpaid
• Remarks if any
Question 14
(b) Reporting whether company is declared willful defaulter by any bank or financial institution or
During the financial year ended on 31/03/2018, LM Private Limited had borrowed from
other lender.
a Nationalized Bank, a term loan of ₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a
machinery for the new plant and ₹ 20 lakhs for erection expenses. As on the date of 31st March, (c) Reporting whether term loans were applied for the purpose intended.
2018, the total of capital and free reserves of the Company was ₹ 50 lakhs and turnover for the (d) Reporting whether funds raised for short term have been utilized for long term purpose, if yes,
year 2017-18 was ₹ 750 lakhs. The Bank paid ₹ 100 lakhs to the vendor of the Company for the then amount and nature of the same.
supply of machinery on 31/12/2017. The machinery had reached the yard of the Company. On
(e) Reporting on whether the company has taken any funds from any entity or person on account
28/02/2018, the Company had drawn the balance of loan viz. ₹ 20 lakhs to the credit of its current
of or to meet obligations of its subsidiaries, joint ventures or associates, if yes, then amount and
account maintained with the Bank and utilized the full amount for renovating its administrative
nature of the same.
office building. The machinery had been kept as capital stock under construction. Comment
as to reporting issues, if any, that the Auditor should be concerned with for the financial year (f) Reporting on whether the company has raised loans on the pledge of securities held in its
ended on 31/03/2018, in this respect. (PYP 5 Marks, Nov ‘18) subsidiaries, joint ventures and associates, if yes, then give details and also report any default in
repayment, if any (As per CARO 2020)
Answer 14
The auditor should examine the terms and conditions subject to which the company has obtained
Applicability of CARO, 2016 (CARO 2020). and Utilization of Term Loan: CARO, 2016 (CARO
the term loans. The auditor may also examine the proposal for grant of loan made to the bank. As
2020). specifically exempts a private limited company, not being a subsidiary company of a public
mentioned above, normally, the end use of the funds raised by term loans is mentioned in the sanction
company, having a paid up capital , reserves & surplus not more than rupees one crore as on balance
letter or documents containing the terms and conditions of the loan. The auditor should ascertain
sheet date and which does not have total borrowing exceeding rupees one crore from any bank or
the purpose for which term loans were sanctioned. The auditor should also compare the purpose for
financial institution at any point of time during the year and which does not have a total revenue as
which term loans were sanctioned with the actual utilization of the loans. The auditor should obtain
disclosed in Schedule III to the companies Act 2013 exceeding Rd 10 crore during the financial year
sufficient appropriate audit evidence regarding the utilization of the amounts raised. If the auditor
as per financial statements.
finds that the funds have not been utilized for the purpose for which they were obtained, the auditor’s
In the case of LM Pvt. Ltd, it has paid up capital of rupees 50 lacs which is below the specified report should state the fact.
limit of rupees 1 crore and turnover is rupees 7.5 crore which is also less than specified rupees 10
In the present case, the term loan obtained by LM Private Ltd. amounting rupees 20 lakh have not
crore. However, there is total borrowing of rupees 1.20 crore which is more than rupees 1 crore and
been utilized for erection expenses instead its utilized for renovating its administrative office building.
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Further, assuming that erection work has not been done and machinery is not being installed, disclosure auditor would be required to report in CARO as per Clause (viii) of Paragraph 3 of CARO, 2020.
of the same as Capital Stock under construction is in order. Clause (viii) of Paragraph 3 of CARO, 2020 requires the auditor to report -whether any transactions
Here, the auditor should report the fact in his report that pending utilization of the term loan for not recorded in the books of account have been surrendered or disclosed as income during the year
erection expenses, the funds were temporarily used for the purpose other than the purpose for which in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously
the loan was sanctioned as per clause (ix) of Para 3 of CARO, 2016 (CARO 2020). unrecorded income has been properly recorded in the books of account during the year.
Since it is a statutory obligation on the part of the auditor to report in terms of CARO, 2020 as given above
and consequently management’s request to the auditor that not to report the above transactions is not tenable.
Question 15
You are appointed as the Auditor of XMP Pvt. Ltd. for financial year 2021-22 after the resignation
of RS & Co. Chartered Accountants, as statutory auditor of the company. RS & Co., had certain Question 16
concerns on the accounting matters of the company, leading to change of auditors. All the SPM Ltd., about to complete fifty years of age since its incorporation in the F.Y 2023-2024,
compliances under Sections 139 and 140 are made by the company with regard to resignation decided during the F.Y year 2022-23 to upgrade its registered office at an important location in
and appointment. Mumbai city. As part of planned package, it decided to acquire a land very adjacent to the site of
During the course of audit, it came to your notice that a survey has been conducted on December registered office, which had been owned by Mr. Parry, who is a director of the Company. Since
7, 2021 by the Income Tax Department and department has unearthed unrecorded sales of ₹ 5 he was reluctant to part with the ownership, he had been persuaded to convey the property in
lakhs which had been made in cash on different dates during the year 2020-21. XMP Pvt. Ltd. favour of the company in exchange of a site owned by the company located at the next street
has purchased gold from such collections and these transactions are not recorded. Company to the street where the registered office is situated, which is 1.50 times larger in area than that
surrendered and disclosed these transactions before the assessing officer and paid taxes thereon. of the site owned by the director adjacent to the Registered office. Happier with what he was
However, company has not recorded those transactions in books of account even after surrender offered in negotiation, Mr. Parry agreed for transferring the property in favour of the company
before Income Tax authorities. in a deed of exchange duly executed by authorized persons of the Board, and Mr. Parry. The
You want to report the above matters in CARO, but the management requested you not to registration formalities were completed by 31st December, 2022. Assuming that you are the
report them. Comment with respect to auditor’s response to the management and his reporting engagement partner for the audit of the accounts of the company for the financial year ended
requirements to the shareholders. (PYP 5 Marks Nov 22) on 31st March, 2023, give a list of additional audit procedures and reporting requirements, if
any, that this transaction might trigger in your audit. (PYP 5 Marks May ‘23)
Answer 15
Answer 16
Clause (xviii) of Paragraph 3 of CARO, 2020:
CARO Audit Procedures and Reporting:
In the given situation of XMP Pvt Ltd, the auditors RS & Co. resigned due to concerns on the accounting
matters of the company. However, all the compliances regarding resignation and appointments In the given situation, SPM Ltd has entered into non-cash transactions with one of the directors, Mr.
discussed in section 139 and 140 of the Companies Act, 2013 are also being complied with. The Parry during the year, by transferring the property (by Mr. Parry) in favour of the Company in a deed
auditor would be required to report the same in CARO, 2020 as per Clause (xviii) of Paragraph 3 of of exchange of a site owned by the company.
CARO, 2020 given hereunder: Paragraph 3 Clause (xv) of the CARO 2020 & Reporting Requirements:
Clause (xviii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether there has been The auditor is required to report the transaction as per Paragraph 3(xv) of the CARO, 2020 which
any resignation of the statutory auditors during the year, if so, whether the auditor has taken into states that whether the company has entered into any non-cash transactions with directors or persons
consideration the issues, objections or concerns raised by the outgoing auditors. connected with him and if so, whether the provisions of section 192 of Companies Act have been
Clause (viii) of Paragraph 3 of CARO, 2020: complied with.
Further, the auditors noticed that a survey was conducted by the Income Tax Department and unrecorded For reporting on the first part of this clause, the starting point of the auditor’s procedures could be
sales of Rs 5 Lakhs were unearthed which had been made in cash on different dates during the year. obtaining a management representation as to whether the company has undertaken any non-cash
XMP Pvt Ltd. has also purchased gold and the transactions remained unrecorded. Though Company transactions with the directors or persons connected with the directors, as envisaged in section 192(1)
surrendered and disclosed these transactions before the Assessing Officer and paid taxes thereon. The of the Act.

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The second part of this clause requires the auditor to report whether the company has complied with accounted in the financial statements based on the amounts paid, no separate disclosure has
the provisions of section 192 in this regard. Section 192(1) and (2) of the Act envisage the following been made in the notes forming part of the accounts. Give your comments for reporting under
compliances in respect of such transactions: CARO 2016 (CARO 2020). (PYP 4 Marks, Nov ‘20)
(i) The company should have obtained a prior approval for such arrangement by a resolution in the Answer 17
general meeting. According to clause (xiii) of Para 3 of CARO, 2016 (CARO 2020), whether all transactions with the
(ii) Notice for approval of the resolution should contain details of the arrangement along with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable
value of assets involved. and the details have been disclosed in the Financial Statements etc., as required by the applicable
The auditor should check compliance with section 192(2) of the Act and verify the notice of the accounting standards.
general meeting that it includes particulars of arrangement along with the value of the assets involved Therefore, the duty of the auditor, under this clause is to report
in such arrangements. i. Whether all transactions with the related parties are in compliance with section 177 and 188 of
This transaction was duly executed by the authorised persons of the Board. The auditor has to state the the Companies Act,2013:
fact whether approval has been obtained in the general meeting of the company. ii. Whether related party disclosures as required by relevant Accounting Standards (AS 18, as may
Related Party Transactions be applicable) are disclosed in the financial statements.
This is a transaction with a related party. The provisions of section 188 of the Companies Act, 2013 as In the Instant case, MG Associates is a related party and also rendering marketing services to MM Ltd.
regards Related Party Transactions are to be checked for compliance. Section 189 of the Companies in return of Consideration of ₹ 4 Lakhs which is related party transaction. No separate disclosure has
Act, 2013 requires a register to be maintained wherein the contract with related parties are to be been made in the notes to accounts in this context, which was required to be made.
entered. In view of above, Auditor shall report under the above clause as under:
The compliance with section 177 and section 188 has to be reported under Clause (xiii) of the CARO, 1. Nature of the related party relationship and the underlying transaction-MG Associates is a
2020. partnership firm in which Director of MM Ltd is also a managing partner, with a profit sharing
Documents to be verified: ratio of 30 %. Payment of ₹ 4 Lakhs to MG Associates is a related party transaction.
A scrutiny of the following books of account, records and documents could provide source of such 2. Amount involved is Consideration for the Marketing services rendered by MG Associates (₹ 4
audit evidence to the auditor as to the existence of such non- cash transactions. Lakhs p.m.) is higher than the arm’s length pricing by ₹ 1.50 Lakh p.m. (₹ 18 Lakhs p.a.)
• Register of Loans, Guarantee, Security and Acquisition Made by the Company, Register of
Contracts with Related Party and Contracts and Bodies etc. in which Directors are Interested.
Multiple Choice Questions (MCQs)
• Movements in the Fixed Asset Register.
Question 1
• Minutes book of the General Meeting and Meetings of Directors.
One of your team members has recently qualified as a chartered accountant and joined your
• Report on Annual General Meeting. team to audit a portfolio of audit clients who are private companies. One of the clients Surrey
Pvt. Ltd. is a hotel in the small town near Jaipur. The revenue generated for the current year
ended is Rs.10.5 crores and the entity is not a holding or subsidiary of any public company.
Question 17
The owner of the business Mr. Hazelwood runs this family business from last 10 years. Your
In the course of audit of MM Ltd. for the financial year ended 31st March, 2019, your audit team member is keen to know whether Surrey Pvt . Ltd is required to comment on the matter
team has identified the following matter: prescribed under CARO 2016 (CARO 2020). Which of your explanations to him are correct?
All amount of ₹ 4 Lakh per month for the marketing services rendered is paid to M/s. MG (a) The entity’s revenue exceeds Rs.10 crores. Hence, no need to comment on the matter prescribed
Associates, a partnership firm in which Director of MM Ltd. is also a managing partner, with under CARO 2016 (CARO 2020).
a profit sharing ratio of 30%. Based on an independent assessment, the consideration paid is
(b) The entity is not a holding or subsidiary of any public company, hence no need to comment on
higher than the arm’s length pricing by ₹ 1.50 Lakh per month. Whilst the transaction was
the matter prescribed under CARO 2016 (CARO 2020).

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(c) The entity’s revenue for the year is Rs.10.5 cr which exceed the limit of Rs.10 cr. Hence, the With respect to the loans, management was of the view that the total outstanding as at 31 March
entity has to provide the comment on the matter prescribed under CARO 2016 (CARO 2020). 2021 is less than the prescribed limit. The company further contended that loan limit is to be
(d) The entity is not a holding or subsidiary of any public company, hence there is a need to comment reckoned per bank or financial institution and not cumulatively. Comment.
on the matter prescribed under CARO 2016 (CARO 2020). (MTP 1 Mark , Mar 19) (a) The CARO 2016 (CARO 2020) is applicable to the company as the turnover of the company
Ans: (c) exceeds the prescribed limit.
(b) The CARO 2016 (CARO 2020) is not applicable to the company as the turnover of the company
does not exceeds the prescribed limit.
Question 2
(c) The CARO 2016 (CARO 2020)is not applicable to the company as the borrowing of the company
Honeywell Ltd, a listed company pays its key managerial persons the remuneration in excess of does not exceeds the prescribed limit.
the limits which have been prescribed under 197 of the Companies Act, 2013 without obtaining
(d) The CARO 2016(CARO 2020) is applicable to the company as the borrowing of the company
the necessary approvals from the regulatory authority. In this circumstance, the auditor while
exceeds the prescribed limit.(MTP 1 Mark Nov 21)
reporting under CARO 2016 (CARO 2020), is required to state:
Ans: (d)
(a) Name of the managerial persons to whom the remuneration has been paid in excess of limits and
the amount involved.
(b) Name of the managerial persons to whom the remuneration in excess of limits are paid and the Question 4
steps taken by the company for securing refund of the same. While reporting under clause (ii) of Paragraph 3 of CARO 2020, which of the following is
(c) The maximum remuneration payable and amount paid in excess of the maximum remuneration correct:
to the managerial persons. (a) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
(d) The amount involved and steps taken by the company for securing the refund of the same. (MTP shortages within the class of an inventory and must be based on value for each class of Inventory.
2 Marks, Oct 19) (b) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
Ans: (d) shortages within the class of an inventory and must be based on value for all classes of Inventory.
(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and
shortages within the class of an inventory and must be based on value for each class of Inventory.
Question 3
(d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and
Kinfin Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C)
shortages within the class of an inventory and must be based on value for all classes of Inventory.
with a limit of ₹ 40 lacs each against the security of fixed deposit it had with those banks and an
(MTP 1 Mark April 22)
unsecured overdraft from a financial institution (Financial Institution X) of ₹ 36 lacs.
Ans: (c)
As on 30th October 2019, the management used the overdraft fully of the A & C bank to the
tune of ₹ 40 lacs each. However, the overdraft of second bank (Bank B) was not used until 31 st
December, 2020. Question 5
On 31 December, 2020, Management took overdraft of B bank and very next day management
st
KFintech Pvt Ltd was having paid-up share capital and reserves of ₹ 150 lakh including paid-
paid the overdraft of C bank as the rate of interest charged by Bank C on overdraft facility was up share capital of ₹ 90 lakh at the end of FY 20-21. During FY 21-22, KFintech borrowed ₹
15% whereas, the rate of interest charged by Bank B was 12%. 80 Lakh from Bank A and ₹ 140 Lakh from Bank B. The amount borrowed from Bank B was
As at 31st March 2021 only overdraft of Bank A and Bank B were used fully , overdrafts of Bank repaid during the same FY. For FY 20-21 the turnover of the company was ₹ 1,850 lakh. Select
C and Financial Institution X were unused. The paid-up capital and reserves of the company as the appropriate option with respect to the applicability of CARO 2020:
at that date was ₹ 85 lacs and its revenue for the financial year ended on 31st March 2021 was ₹ a) CARO 2020 will be applicable as the paid-up capital and reserves exceeding the limit specified
8.95 crores. The management of the company is of the opinion that CARO, 2016 (CARO 2020) in the Order i.e., one crore rupees.
is not applicable to it because turnover and paid-up capital were within the limits prescribed.
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b) CARO 2020 will be applicable as the company has paid-up capital and reserves exceeding the a. Considering this as a statutory non-compliance, the auditor should look at the significance of the
limit specified in the Order i.e., one crore rupees and have total borrowings exceeding one crore matter and accordingly should report the same in CARO only.
rupees from any bank or financial institution at any point of time during the financial year.
b. Considering this as a statutory non-compliance, the auditor should look at the significance of the
c) CARO 2020 will not be applicable as the company repaid the amount borrowed from bank B matter and accordingly should consider reporting this in the main report along with CARO.
before the end of the financial year and hence, the borrowings do not exceed the limit specified
c. The auditor should agree to the management’s view as the expats are temporary workers and this
in the Order.
may not be convenient for the management.
d) CARO 2020 will not be applicable as the company will fall under the exemption provided in the
d. Since the matter relates to statutory liability only, the reporting requirements do not arise till the
Order for Small Company as per section 2(85) of the Companies Act 2013. (MTP 1 Mark Sep ‘22)
time this becomes disputed. (MTP 1 Mark March ’23, RTP May’19)
Ans 5 : (d)
Answer 7 : (b)
Question 6
Question 8
CA. A, the auditor of XYZ Limited resigned from the post due to his personal reasons. CA. B
CA Aarti is in the midst of performing audit procedures in the month of March 2023 for
was appointed as the subsequent auditor of the company by the Board of Directors. During
conducting a statutory audit of “Tess Products Private Limited” engaged in manufacturing
the conclusion of the audit for the FY, should CA. B mention about CA. A ’s resignation in the
of footwear products for the year 2022-23. The turnover of the company as per profit and loss
Companies (Auditor’s Report) Order 2020?
account for the immediately preceding financial year is ₹ 35 crores. In the last week of March
(a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA. A and 2023, she gathered that the turnover of the company during the year 2022-23 would also be just
state if he has taken into consideration the issues or objections raised by CA. A. nearing ₹ 35 crores. The company is also registered as a “Small Enterprise” under the Micro,
(b) No. Since the resignation of CA. A is due to his own personal reason, the same need not be Small and Medium Enterprises Development Act, 2006. Its present paid-up share capital is ₹3.50
reported under CARO. crores, which has remained unchanged for the past few years. Besides, it is availing and utilizing
(c) Yes. As per clause (xxi) of para 1 of CARO, CA. B should report the resignation of CA. A and a working capital credit facility of ₹ 2 crores from a bank during all these years, including the
state if he has taken into consideration the issues or objections raised by CA. A. year 2022-23. The company has acquired all shares of a company based in Hong Kong during
the year 2022-23. She wants to be sure about the applicability or otherwise of CARO 2020 for
(d) No. CARO 2020 does not state any requirements to report resignation of auditor. However, the
suitably planning and directing her audit procedures for year 2022 -23. Identify likely correct
same needs to be mentioned by CA. B in the Audit Report under Other Matter Paragraph, as per
statement in this regard:
SA 706.(MTP 1 Mark Oct 22)
(a) Reporting under CARO, 2020 would not be applicable as it is a small company.
Answer 6 : (a)
(b) Reporting under CARO, 2020 would not be applicable as it is registered as a small enterprise
under Micro, Small and Medium Enterprises Act, 2006.
Question 7 (c) Reporting under CARO, 2020 would be applicable as it is not a small company.
ASAUS Ltd is in the business of optics and imaging products. It is a wholly owned subsidiary (d) Reporting under CARO, 2020 would not be applicable as it meets certain threshold criteria
of Japanese company, ASU Ltd. ASAUS Ltd has many expatriates (Expats) working in the prescribed for private companies. (MTP 1 Mark Oct ’23)
company whose tenure range from 2 to 5 years. During the course of audit of financial statements
Answer 8 : (c)
of the company, the statutory auditors observed that the company has not been deducting and
depositing the TDS (tax deducted at source) on salaries of expats. The auditors assessed that the
impact of this can be significant as the company has many expats and salary amount is significant.
Management explained that TDS on salary of expats would lead to unnecessary hassles to the
expats and they serve the company only for a short period. How should the auditors of ASAUS
Ltd deal with this matter?

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While auditing with respect to compliance with CARO, 2020, Mr. Omprakash, for additional Under the applicable Standards on Auditing, in what circumstances does the report of the
reporting purpose, observed the following, relevant to Para 3(vii) of CARO, 2020: statutory auditor require modifications? What are the types of modifications possible to the
said report?
Undisputed Amount
Statutory Dues Date Payable Date Paid Answer 1
(₹ in lakh)
SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when,
Provident Fund 1.5 24th September, 2021 27th March, 2022
in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification
GST 2.45 23rd October, 2021 24th April, 2022 to the auditor’s opinion on the financial statements is necessary.
Customs Duty 0.65 20th September, 2021 10th April, 2022 Types of Modified Opinions as per SA 705:
Income Tax Demand for A.Y. (i) Qualified Opinion
0.55 18th October, 2021 Not Paid till date
2019-20
(ii) Adverse Opinion
Also, a representation was made to GST Department for waiving a penalty of ₹ 1 lakh for late
(iii) Disclaimer of Opinion
payment of GST demand. What total amount of statutory dues need to be reported by Mr.
Omprakash as per Para 3 of CARO? The decision regarding which type of modified opinion is appropriate depends upon:
(a) ₹ 3.10 lakh. (a) The nature of the matter giving rise to the modification, that is, whether the financial statements are
(b) ₹ 0.65 lakh.
may be materially misstated; and
(c) ₹ 3.65 lakh.
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on
(d) ₹ 2.70 lakh. (RTP Nov’22) the financial statements.
Answer 9 (b) Qualified Opinion: The auditor shall express a qualified opinion when:
The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
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
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.
Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any, could be both
material and pervasive. The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient
appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form
an opinion on the financial statements due to the potential interaction of the uncertainties and their
possible cumulative effect on the financial statements.

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Question 2 opinion is in due accordance with facts, and that it is arrived at by the application of due care and
Write a short note on Emphasis of matter paragraph in Audit Reports. skill. The ‘report’ involves expression of opinion which may differ from one professional to another.
There is no question of exactitude in case of a report since the information contained therein is based
Answer 2
on estimates and involves judgement element.
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 judgment, is of
such importance that it is fundamental to users’ understanding of the financial statements. Question 4
If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in Compare and explain the following:
the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental (i) Reporting to Shareholders vs. Reporting to those Charged with Governance
to users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter
(ii) Audit Qualification vs. Emphasis of Matter.
paragraph in the auditor’s report provided:
Answer 4
(a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as
a result of the matter; and (i) Reporting to Shareholders vs. Reporting to those Charged with Governance:
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated
REPORT
in the auditor’s report.
Reporting to Shareholders Reporting to those Charged with Governance
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall: • Section 143 of the Companies Act, 2013 deals
• Standard on Auditing 260 deals with the
with the provisions relating to reporting to
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading provisions relating to reporting to those Charged
Shareholders. Thus, it is a Statutory Audit Report
that includes the term “Emphasis of Matter”; with Governance.
which is addressed to the members.
(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant • It is a reporting on matters those charged with
disclosures that fully describe the matter can be found in the financial statements. The paragraph • Statutory Audit Report is on true and fair view
governance like scope of audit, audit procedures,
shall refer only to information presented or disclosed in the financial statements; and and as per prescribed Format.
audit modifications, etc.
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized. • Reporting to those Charged with Governance is
Statutory Audit Reports are in public domain.
an internal document i.e., private report.
Question 3 (ii) Audit Qualification vs. Emphasis of Matter:
Write a short note on Certificate for Special Purpose vs. Audit Report. REPORT
Answer 3 Audit Qualification Emphasis of Matter
Certificate for Special Purpose vs. Audit Report: A certificate is a written confirmation of the • Standard on Auditing 705 “Modifications to the • Standard on Auditing 706 “Emphasis of Matter
accuracy of the facts stated therein and does not involve any estimate or opinion. The term ‘certificate’ Opinion in the Independent Auditor’s Report”, Paragraphs and Other Matter Paragraphs in the
is, therefore, used where the auditor verifies the accuracy of facts. An auditor may thus, certify the deals with the provisions relating to Audit Independent Auditor’s Report” deals with the
circulation figures of a newspaper or the value of imports or exports of a company. An auditor’s Qualification. provisions relating to Emphasis of Matter.
certificate represents that he has verified certain figures and is in a position to vouch safe their accuracy • Audit Qualifications are modifications to the • Emphasis of Matter is a paragraph which
as per his examination of documents and books of account. A report, on the other hand, is a formal opinion of the Auditors opinion where the auditor is included in auditor’s report to draw users’
statement usually made after an enquiry, examination or review of specified matters under report and concludes that there is a material misstatement attention to important matter(s) which are
includes the reporting auditor’s opinion thereon. Thus, when a reporting auditor issues a certificate, he in the financial statement due to which the already disclosed in Financial Statements and
is responsible for the factual accuracy of what is stated therein. On the other hand, when a reporting modification to the opinion of the auditor is are fundamental to users’ for understanding of
auditor gives a report, he is responsible for ensuring that the report is based on factual data, that his necessary. Financial Statements.

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• The Emphasis of matter pre- supposes that there (a) When reporting in accordance with a fair presentation framework, the accompanying financial
is Sufficient Appropriate audit evidence and the statements do not present fairly (or give a true and fair view of) […] in accordance with [the
matter has been correctly disclosed. applicable financial reporting framework]; or
• Audit Qualifications are given when auditor • Emphasis of Matter is a paragraph which is (b) When reporting in accordance with a compliance framework, the accompanying financial
has concluded that the financial statementsare issued when the auditor feels that it is necessary statements have not been prepared, in all material respects, in accordance with [the applicable
materially misstated or do not confirm to the to invite attention to a particular mater which financial reporting framework].
financial reporting framework. Depending has been appropriately disclosed in the financial (iii) When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
upon the nature of material misstatement being statements which in the opinion of the auditor is evidence, the auditor shall:
pervasive or otherwise the appropriate type of necessary for better understanding of the financial
modified opinion is issued. statement. (a) State that the auditor does not express an opinion on the accompanying financial statements;
(b) State that, because of the significance of the matter(s) described in the Basis for Disclaimer of
Question 5 Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
Opinion,” (c) Amend the statement required in SA 700 (Revised), which indicates that the financial statements
have been audited, to state that the auditor was engaged to audit the financial statements.
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” As
an expert
you are required to brief the special considerations required for expressing: Question 6
(a) Qualified Opinion; ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course of audit,
(b) Adverse Opinion and the statutory auditors have come across certain significant observations which they believe could lead
to material misstatement of financial statements. Management has a different view and does not concur
(c) Disclaimer of Opinion.
with the view of the statutory auditors. Considering this the statutory auditors are determining as to
Answer 5 how to address these observations in terms of their reporting requirement. Please advise.
(i) When the auditor expresses a qualified opinion due to a material misstatement in the financial Answer 6
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the
As per SA 705 (Revised), if the auditor concludes that, based on the audit evidence obtained, the
matter(s) described in the Basis for Qualified Opinion section:
financial statements as a whole are not free from material misstatement or the auditor is unable to
(a) When reporting in accordance with a fair presentation framework, the accompanying financial obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are
statements present fairly, in all material respects (or give a true and fair view of) […] in accordance free from material misstatement, the auditor shall modify the opinion in his report.
with [the applicable financial reporting framework]; or
The auditor in such a case needs to determine the modification as follows:
(b) When reporting in accordance with a compliance framework, the accompanying financial
Qualified Opinion: The auditor shall express a qualified opinion when:
statements have been prepared, in all material respects, in accordance with [the applicable
financial reporting framework]. (a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
When the modification arises from an inability to obtain sufficient appropriate audit evidence, the
auditor shall use the corresponding phrase “except for the possible effects of the matter(s) ...” for the (b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
modified opinion. but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
(ii) When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s
opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion (i) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
section: obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the financial statements

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(ii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain When the auditor’s report refers to both the ISAs or the auditing standards of a specific jurisdiction
sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes and the Standards on Auditing issued by ICAI, the auditor’s report shall clearly identify the same
that the possible effects on the financial statements of undetected misstatements, if any, could including the jurisdiction of origin of the other auditing standards.
be both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having
obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is Question 8
not possible to form an opinion on the financial statements due to the potential interaction of the TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj & Associates
uncertainties and their possible cumulative effect on the financial statements. are the statutory auditors of the company for the FY 2022-23. During the course of audit, CA
Saroj noticed that the company had a major customer, namely, Korean Mart from South Korea.
Owing to an outbreak of war and subsequent destruction leading to government ban on import
Question 7 and export in South Korea, the demand from Korean Mart for the products of TUV Ltd. ended
KPI Ltd is a joint venture of KPI Inc, a company based in US, and OPQ Ltd, a company based for an unforeseeable time period.
in Japan (hereinafter referred to as ‘JV partners’). KPI Ltd was registered in India and is
operating as a marketing support company for KPI Inc. All the costs of KPI Ltd are incurred When discussed with the management, CA Saroj was told that the company is in the process of
in India and entire revenue of KPI Inc is generated in USD. The entire funding requirements of identifying new customers for their products. CA Saroj understands that though the use of going
KPI Ltd are taken care of by the JV partners. concern assumption is appropriate but a material uncertainty exists with respect to the identification
Since KPI Ltd is based in India, hence it is also required to get its financial statements audited. of new customers. This fact is duly reflected in the financial statements of TUV Ltd. for the FY 2022-23.
The company appointed new auditors for the audit of the financial statements for the year How should CA Saroj deal with this matter in the auditor’s report for the FY 2022-23?
ended 31 March 2023 after doing all appointment formalities wherein auditors are required to Answer 8
ensure compliance with Standards on Auditing and Internal Standards on Auditing.
As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the operating
As an expert you are required to advise the auditor about the requirements regarding auditor’s
indicators that may cast significant doubt on the company’s ability to continue as a going concern.
report for audits conducted in accordance with both Standards on Auditing issued by ICAI and
International Standards on Auditing. In the present case, TUV Ltd. has a key customer in South Korea from which the demand for its
products has ended on account of outbreak of war, subsequent destruction and government ban on
Answer 7
import and export in South Korea. Further, the company has not yet identified new customers and is
An auditor may be required to conduct an audit in accordance with, in addition to the Standards on in the process of doing the same. As such, the identification of new customer is a material uncertainty
Auditing issued by ICAI, the International Standards on Auditing or auditing standards of any other that cast a significant doubt on the company’s ability to continue as a going concern.
jurisdiction. If this is the case, the auditor’s report may refer to Standards on Auditing in addition
However, this matter is duly disclosed by the management of TUV Ltd. in the financial statements for
to the International Standards on Auditing or auditing standards of such other jurisdiction, but the
the year ended 31.03.2023.
auditor shall do so only if:
As such, considering that the going concern assumption is appropriate but a material uncertainty
(a) There is no conflict between the requirements in the ISAs or such auditing standards of other
exists with respect to identification of new customer, CA Saroj should:
jurisdiction and those in SAs that would lead the auditor:
(1) Express an unmodified opinion and
(i) to form a different opinion, or
(2) Include in his audit report, a separate section under the heading “Material Uncertainty Related to
(ii) not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the particular
Going Concern” to:
circumstances, is required by SAs; and
(i) Draw attention to the note in the financial statements that discloses the matters and
(b) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report
Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording (ii) State that these events or conditions indicate that a material uncertainty exists that may cast
specified by the Standards on Auditing. However, reference to “law or regulation” in above significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
paragraph shall be read as reference to the Standards on Auditing. The auditor’s report shall opinion is not modified in respect of the matter.
thereby identify such Standards on Auditing. (3) Thus, CA Saroj should deal with this matter in his auditor’s report in the above-mentioned manner.
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Question 9 • Key Managerial Personnel leaving the company.

Sun Moon Ltd. is a power generating company which uses coal as raw material for its power • Banks decided not to extend further finance and not to fund the working capital requirements of
generating plant. The company has been allotted coal blocks in the state of Jharkhand and the company.
Odisha. During the FY 2022-23, a scam regarding allotment of coal blocks was unveiled leading • Non availability of sound action plan to mitigate such circumstances.
to a ban on the allotment of coal blocks to various companies including Sun Moon Ltd. This
happened in the month of December 2023 and as such entire power generation process of Sun
Moon Ltd, came to a halt in that month. As a result of such ban, and the resultant stoppage of Question 10
the production process, many key managerial personnel of the company left the company. There
CA Omkar is the statutory auditor of Sabhyata Ltd. for the FY 2022-23. The company is engaged
were delays in the of payment of wages and salaries and the banks from whom the company had
in the business of manufacture of floor tiles. During the course of audit, CA Omkar obtained
taken funds for project financing also decided not to extend further finance or to fund further
certain audit evidence which were not consistent with the affirmation made in the financial
working capital requirements of the company.
statements. Discuss as to how CA Omkar should deal with the situation in the auditor’s report.
Further, when discussed with the management, the statutory auditor understood that the
Answer 10
company had no action plan to mitigate such circumstances. Further, all such circumstances
were not reflected the financial statements of Sun Moon Ltd. What course of action should the SA 705 (Revised) deals with the auditor’s responsibility to issue an appropriate report in circumstances
statutory auditor of the company consider in such situation? when, in forming an opinion in accordance with SA 700, the auditor concludes that a modification to
the auditor’s opinion on the financial statements is necessary.
Answer 9
The decision regarding which type of modified opinion is appropriate depends upon:
SA 570 - “Going Concern” deals with the auditor’s responsibilities in the audit of financial statements
relating to going concern and the implications for the auditor’s report. (a) The nature of the matter giving rise to the modification, that is, whether the financial statements are
The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and
may be materially misstated; and
conclude on, the appropriateness of management’s use of the going concern basis of accounting in
the preparation of the financial statements, and to conclude, based on the audit evidence obtained, (b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on
whether a material uncertainty exists about the entity’s ability to continue as a going concern. the financial statements.
When the use of Going Concern Basis of Accounting Is Inappropriate i.e. if the financial statements Further, the auditor shall modify the opinion in the auditor’s report when the auditor concludes that
have been prepared using the going concern basis of accounting but, in the auditor’s judgment, based on the audit evidence obtained, the financial statements as a whole are not free from material
management’s use of the going concern basis of accounting in the preparation of the financial misstatement.
statements is inappropriate, the auditor shall express an adverse opinion. In the present case, during the course of audit, CA Omkar obtained certain audit evidence which were
Also, when adequate Disclosure of a Material Uncertainty Is Not Made in the Financial not consistent with the affirmation made in the financial statements. Therefore, CA Omkar should
Statements the auditor shall: modify his report in accordance with SA 705- “Modifications to The Opinion In The Independent
Auditor’s Report.
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised);
and CA Omkar should issue either a qualified opinion or an adverse opinion depending upon the
circumstances of the case:
(ii)In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going (a) CA Omkar shall express a qualified opinion when, having obtained sufficient appropriate audit
concern and that the financial statements do not adequately disclose this matter. evidence, he concludes that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements
In the present case, the following circumstances indicate the inability of Sun Moon Ltd. to
continue as a going concern: (b) CA Omkar shall express an adverse opinion, when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are
• Ban on the allotment of coal blocks
both material and pervasive to the financial statements.
• Halt in power generation

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Thus, since CA Omkar has obtained audit evidence which are inconsistent with the affirmations made Answer 12
in the financial statement, CA Omkar should modify his opinion as per the circumstances of the case. The above matter is in nature of Key audit matter and should be stated under heading “Key audit
matters” in audit report. Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial statements of the current period. Key
Question 11
audit matters are selected from matters communicated with those charged with governance.
The auditors of a listed company have affirmed in their audit report communication of significant
SA 701 states that the auditor shall determine, from the matters communicated with those charged
audit findings including significant deficiencies in internal control of the company identified to
with governance, those matters that required significant auditor attention in performing the audit. In
those charged with governance. Where are such matters included in audit report of a listed
making this determination, significant auditor judgments relating to areas in the financial statements
company? Also dwell upon importance of such communication.
that involved significant management judgment including accounting estimates that have been
Answer 11 identified as having high estimation uncertainty be taken into account.
Such matters are in nature of auditor’s responsibilities and are stated in “The Auditor’s Responsibilities The above-described matter relates to revenue recognition and creation of complexities requiring
for the Audit of the Financial Statements” section of the auditor’s report in accordance with SA 700. judgment in revenues. Further, the description also describes how the matter was addressed by auditors
Communication of significant audit findings and deficiencies identified in internal control to those by performing various audit procedures in accordance with SA 701.
charged with governance is one of important responsibilities of auditor.
Such communication assists those charged with governance in fulfilling their responsibility to oversee Question 13
the financial reporting process and in fulfilling their oversight responsibilities.
PTD Limited is engaged in business of executing construction contracts for its clients. There are non
current receivables outstanding in financial statements of the company as on 31st March, 2023 for ₹500
Question 12 crore. Such amounts represent claims raised by the company on its clients relating to cost overruns
necessitated due to delays caused by clients, change in work specifications and related matters. Besides
Below is draft extract of audit report of a listed company. Para (A) below reflects certain matter
negotiations, the company has also gone for arbitration in some of the said cases. The management of
stated in audit report communicated with CFO of company and Para (B) is in nature of auditor’s
company has considered above amounts to be fully recoverable as stated in notes to accounts.
response to said matter.
CA. Piyush, auditor of the company, has relied only upon management representation in this
(A) The Company recognizes revenues when the control of goods is transferred to the customer at
regard. Besides, he has decided to include the said matter in “Emphasis of Matter” Paragraph
the net consideration which the Company expects to receive for those goods from customers
in audit report. How do you view decision to include above matter in “Emphasis of Matter”
in accordance with contracts terms and conditions.
Paragraph by auditor of the company?
The terms of sales arrangements based on the terms and conditions of relevant contract and
Answer 13
nature of discount and rebates create complexities that require judgment in determining
revenues. In accordance with SA 706, Emphasis of Matter Paragraph is a paragraph included in the auditor’s
report that refers to a matter appropriately presented or disclosed in the financial statements that, in
(B) We read the Company’s revenue recognition policy and assessed its compliance in terms of
the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the
Ind AS 115 “Revenue from contracts with customers”.
We assessed design and tested the operating effectiveness of internal controls related to sales
As per SA 706, the objective of the auditor, having formed an opinion on the financial statements,
and rebates/discounts.
is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear
We tested on a sample basis that revenue has been recognized in the proper period with reference additional communication in the auditor’s report, to: -
to the supporting documents including confirmations from customers.
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such
From description given above, identify what auditors are trying to report and under what importance that it is fundamental to users’ understanding of the financial statements or
heading such matter should be reflected in audit report of the company?
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report.

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Further, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided the Question ILLUSTRATION 16
auditor would not be required to modify the opinion in accordance with SA 705 as a result of the matter. XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory
In the given situation, auditor has relied upon management representation letter only. He has not auditor of the company for the FY 2022-23. The company has taken long term funding for
performed any other audit procedures like verifying contracts with customers, status of arbitration fixed capital requirements and short-term funding for its working capital requirements. During
proceedings etc. Since management representations by themselves do not constitute sufficient the course of audit, CA Sudhir found that the company’s financing arrangements are about
appropriate evidence, performing necessary audit procedures may lead auditor to conclude that to expire and the company is unable to renegotiate or obtain the replacement financing. As
modification in opinion is necessary. In such circumstances, matter cannot be included in Emphasis such the company may be unable to realize its assets and discharge its liabilities in the normal
of matter Paragraph. course of business. Notes to accounts annexed to the financial statements discuss the magnitude
Therefore, auditor should form his opinion by performing necessary audit procedures and obtaining of financing arrangements, the expiration and the total financing arrangements; however, the
sufficient appropriate evidence. It is only when he concludes that modification of opinion is not financial statements do not include discussion on the impact or the availability of refinancing.
required as a result of said matter in terms of SA 705, the said matter may be included in Emphasis of Thus, the financial statements (and notes thereto) do not fully disclose this fact. What kind of
Matter paragraph. opinion should CA Sudhir issue in case of XYZ Ltd.?
Answer 16
In the present case, XYZ Ltd. is unable to renegotiate or obtain the replacement financing for its
Question ILLUSTRATION 14
long term and short-term funding requirements. This situation indicates the existence of a material
CA Sameer is the statutory auditor of Tram Farm Ltd. for the FY 2022-23. While concluding uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern
the audit CA Sameer decided to issue an unmodified opinion, though he also concluded that a and therefore, XYZ Ltd. may be unable to realize its assets and discharge its liabilities in the normal
material uncertainty exists with respect to the company’s ability to continue as a going concern course of business.
on account of a pending litigation related to labour laws. He is of the view that the company has
Further, the financial statements of XYZ Ltd. do not disclose this fact adequately.
made appropriate disclosures with respect to such pending litigation in the notes to accounts
annexed to the financial statements of Tram Farm Ltd. for the FY 2022-23. Explain how CA Thus, the financial statements of XYZ Ltd. are materially misstated due to the inadequate disclosure
Sameer will deal with the above situation in his auditor’s report (draft the relevant portion of of the material uncertainty. CA Sudhir will express a qualified opinion as the effects on the financial
the auditor’s report.) statements of this inadequate disclosure are material but not pervasive to the financial statements.
Answer 14 The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph
is as under:
Material Uncertainty Related to Going Concern
Qualified Opinion
We draw attention to Note 10 in the financial statements, which indicates that the outcome of a
litigation on account of labour laws is pending in case of the company during the year 31 March, In our opinion and to the best of our information and according to the explanations given to us, except
2023. As stated in Note 11, this event or condition, indicate that a material uncertainty exists that may for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion section
cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not of our report, the aforesaid standalone financial statements give the information required by the Act
modified in respect of this matter. in the manner so required and give a true and fair view in conformity with the accounting principles
generally accepted in India, of the state of affairs of XYZ Ltd. as at March 31, 2023, and profit/loss,
for the year ended on that date.
Basis for Qualified Opinion
The following illustrates the presentation in the auditor’s report if the auditor has determined
As discussed in Note 6, the Company’s financing arrangements are about to expire and the Company
there are no key audit matters to communicate:
has been unable to conclude renegotiations or obtain replacement financing. This situation indicates
Key Audit Matters that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material as a going concern. The financial statements do not adequately disclose this matter.
Uncertainty Related to Going Concern section,] We have determined that there are no [other]
key audit matters to communicate in our report.]
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Question ILLUSTRATION 17 was also unable to obtain audit evidence about the financial information of a joint venture
ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are investment (in XYZ Ltd.) that represents over 90% of the entity’s net assets. What kind of
the statutory auditors of ABC Ltd. for the FY 2022-23. During the course of audit, CA Prakash, opinion should the statutory auditors issue in such case?
the engagement partner, found that the Company’s financing arrangements have expired and Answer 18
the amount outstanding was payable on March 31, 2023. The Company has been unable to re- M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the financial
negotiate or obtain replacement financing and is considering filing for bankruptcy. These events information of a joint venture investment that represents over 90% of the entity’s net assets. The
indicate a material uncertainty that may cast significant doubt on the Company’s ability to possible effects of this inability to obtain sufficient appropriate audit evidence are both material and
continue as a going concern and therefore it may be unable to realize its assets and discharge its pervasive to the consolidated financial statements.
liabilities in the normal course of business. The financial statements (and notes thereto) do not
Therefore, the statutory auditor should issue a disclaimer of opinion.
disclose this fact. What opinion should CA Prakash express in case of ABC Ltd.?
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
Answer 17
paragraph is as under:
In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
Disclaimer of Opinion
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability
to continue as a going concern, and the entity is considering bankruptcy. The financial statements of We do not express an opinion on the accompanying financial statements of MNO Ltd. Because of
ABC Ltd. omit the required disclosures relating to the material uncertainty. the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
In such circumstances, CA Prakash should express an adverse opinion because the effects on the
opinion on these financial statements.
financial statements of such omission are material and pervasive.
Basis for Disclaimer of Opinion
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
as under: The Group’s investment in its joint venture XYZ Company is carried at ₹ 95 crores on the Group’s
consolidated balance sheet, which represents over 90% of the Group’s net assets as at March 31, 2023.
Adverse Opinion
We were not allowed access to the management and the auditors of XYZ Company, including XYZ
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion
Company’s auditors’ audit documentation. As a result, we were unable to determine whether any
section of our report, the accompanying financial statements do not present fairly, the financial position
adjustments were necessary in respect of the Group’s proportional share of XYZ Company’s assets
of the entity as at March 31, 2023, and of its financial performance and its cash flows for the year then
that it controls jointly, its proportional share of XYZ Company’s liabilities for which it is jointly
ended in accordance with the Accounting Standards issued by the Institute of Chartered Accountants
responsible, its proportional share of XYZ’s income and expenses for the year, (and the elements
of India.
making up the consolidated statement of changes in equity) and the consolidated cash flow statement.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. has expired and the amount outstanding was payable
on March 31, 2023. The entity has been unable to conclude re-negotiations or obtain replacement Question ILLUSTRATION 19
financing and is considering filing for bankruptcy. This situation indicates that a material uncertainty CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2022-23. In respect of
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The loans and advances of ₹ 55,00,000/- given to Sarvagya Private Limited, the Company has not
financial statements do not adequately disclose this fact. furnished any agreement to CA Yash and in absence of the same, he is unable to verify the terms
of repayment, chargeability of interest and other terms.
What kind of opinion should CA Yash give in such situation?
Answer 19
MNO Ltd. is a power generating company having its plants in the north eastern states of the
country. For the FY 2022-23, M/s PRT & Associates are the statutory auditors of the company. In the present case, with respect to loans and advances of ₹ 55,00,000/- given to Sarvagya Private
During the course of audit, the audit team was unable to obtain sufficient appropriate audit Limited, the Company has not furnished any agreement to CA Yash. In absence of such agreement,
evidence about a single element of the consolidated financial statements. That is, the auditor CA Yash is unable to verify the terms of repayment, chargeability of interest and other terms. For an

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auditor, while verifying any loans and advances, one of the most important audit evidences is the loan section of our report, the accompanying financial statements do not present fairly, the financial position
agreement. of MSD Ltd. as at March 31, 2023, and of its financial performance and its cash flows for the year then
Therefore, the absence of such document in the present case, tantamount to a material misstatement ended in accordance with the Accounting Standards issued by the Institute of Chartered Accountants
in the financial statements of the company. However, the inability of CA Yash to obtain such audit of India.
evidence is though material but not pervasive so as to require him to give a disclaimer of opinion. Basis for Adverse Opinion
Thus, in the present case, CA Yash should give a qualified opinion MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph of the company. Due to such event it may not be possible for the company to realize its assets or pay
is as under: off the liabilities during the regular course of its business. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going
Qualified Opinion
concern. The financial statement and notes to the financial statements of the company do not disclose
In our opinion and to the best of our information and according to the explanations given to us, this fact.
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the financial statements of Laksmi Vardhan Limited 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 on Question illustration 21
31.03.2023 and profit/ loss for the year ended on that date. Basis for Qualified Opinion CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2022-23. During the course of
The Company is unable to furnish the loan agreement with respect to loans and advances of ₹ audit CA Abhimanyu noticed the following:
55,00,000/- given to Sarvagya Private Limited. Consequently, in absence of such agreement, we are With respect to the debtors amounting to ₹ 150 crores, no balance confirmation was received by
unable to verify the terms of repayment, chargeability of interest and other terms. the audit team. Further, there have been defaults on the payment obligations by debtors on the due
dates during the year under audit. The Company has created a provision for doubtful debts to the
tune of ₹25 Cr. during the year under audit. The Company has stated that the provision is based
on receivables which are older than 36 months, which according to the audit team is inadequate
In the financial year 2022-23, MSD Ltd. faced an extraordinary event (earthquake), which and as such the audit team is unable to ascertain the carrying value of trade receivables.
destroyed a lot of business activity of the company. These circumstances indicate material
Further, in respect of Inventories (which constitutes 40% of the total assets of the company),
uncertainty on the company’s ability to continue as going concern. Due to such event it may not
during the reporting period, the management has not undertaken physical verification of
be possible for the company to realize its assets or pay off the liabilities during the regular course
inventories at periodic intervals. Also, the Company has not maintained adequate inventory
of its business. The financial statement and notes to the financial statements of the company do
records at the factory. The audit team was unable to undertake the physical inventory count as
not disclose this fact. What kind of opinion should the statutory auditor of MSD Ltd. issue in
such the value of inventory could not be verified.
such circumstances?
Under the above circumstances what kind of opinion should CA Abhimanyu give?
Answer 20
Answer 21
In the present case, there exists a material uncertainty that cast a significant doubt on the company’s
ability to continue as going concern and the same is not disclosed in the financial statements of MSD In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit evidence with
Ltd. As such, the financial statements of MSD Ltd. for the FY 2022-23 are materially misstated and respect to the following:
the effect of the misstatement is so material and pervasive on the financial statements that giving only 1. The balance confirmation with respect to debtors amounting to ₹ 150 crores is not available.
a qualified opinion will be insufficient and therefore the statutory auditor of MSD Ltd. should issue Further there has been default in payment by the debtors and the provision so made is not adequate.
an adverse opinion. The audit team is also unable ascertain the carrying value of trade receivables.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph 2. With respect to 40% of the company’s inventory, neither the physical verification has been done
is as under: Adverse Opinion by the management nor are adequate inventory records maintained. The audit team is also unable
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion to undertake the physical inventory count as such the value of inventory could not be verified.

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In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence Answer 22
on which to base the opinion, and the possible effects on the financial statements of undetected Emphasis of Matter
misstatements, if any, could be both material and pervasive.
We draw attention to the following note of the standalone financial statements:
Thus, CA Abhimanyu should give a Disclaimer of Opinion.
Note 27 regarding the plans of the Company to resume construction/developmental activities of a
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion thermal power project. The carrying amounts related to the project as at 31st March, 2023 comprise of
paragraph is as under: plant and equipment of ₹ 5.95 crore and capital work in progress of ₹ 147.50 crore.
Disclaimer of Opinion Our opinion is not modified in respect of this matter.
We do not express an opinion on the accompanying financial statements of PQR Ltd. Because of the Other Matter
significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
We did not audit the financial statements of 5 branches included in the Standalone Financial Statements
of the company whose financial statements reflect total assets of ₹ 90 crores as at 31.03.2023 and total
opinion on these financial statements.
revenue from operations of ₹ 40 crores for the year ended on that date. The financial statements of
Basis for Disclaimer of Opinion these branches have been audited by the branch auditors whose reports have been furnished to us, and
We are unable to obtain balance confirmation with respect to the debtors amounting to ₹ 150 crores. our opinion in so far as it relates to the amounts and disclosures included in respect of these branches,
Further, there have been defaults on the payment obligations by debtors on the due dates during the is based solely on the report of the branch auditors.
year under audit. The Company has created a provision for doubtful debts to the tune of ₹25 Cr. during Our opinion is not modified in respect of this matter.
the year under audit which is inadequate in the circumstances of the company. The carrying value of
trade receivables could not be ascertained. Further, in respect of Inventories (which constitutes 40%
of the total assets of the company), during the reporting period, the management has not undertaken Integrated Case Scenario
physical verification of inventories at periodic intervals. Also, the Company has not maintained CA. Raghav is in midst of finalizing audit reports of five clients. On reviewing each file, it is
adequate inventory records at the factory. We were unable to undertake the physical inventory count noticed as under: -
and as such the value of inventory could not be verified. (a) In case of a company engaged in business of selling of agricultural products which are
outside ambit of GST, engagement team has found that substantial part of revenues of the
company (about 80%) is generated through cash sales. However, there is no proper system
and internal control to verify accuracy of revenues generated through cash sales. Therefore,
In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters. team has been unable to verify such revenues generated through cash sales.
The statutory auditor wants to draw the user’s attention towards such matters, though his
(b) TS Limited has been dragged to court by BS Limited for stealing its trade secrets using cyber
opinion is not modified in respect of such matters. Draft the relevant paragraphs of the audit
theft and filed a claim for ₹50 crore. On reviewing audit file of TS Limited, CA Raghav finds
report for the following matters:
that legal opinion of company’s standing counsel is ambiguous. There are precedent case
i. The company has a plan to resume its construction activities with respect to one of its thermal laws both in favour and against on such issue. The financial statements of TS Limited are
power projects, The activity of such power plant was suspended in the F Y 2020-21. The silent on this litigation matter.
thermal power project comprises of the plant and equipment amounting to ₹ 5.95 crore and
(c) It is noticed on review of audit file of a client that net profit before tax was ₹2 crore on a
capital work in progress of ₹ 147.50 crore.
turnover of ₹100 crore. There is an export receivable from a chain of stores outstanding in
ii. The financial statements of 5 branches are included in the Standalone Financial Statements financial statements of ₹3 crore for which there is no chance of recovery. The said chain
of BDS Ltd. whose financial statements reflect total assets of ₹ 90 crores as at 31.03.2023 and of stores has gone bankrupt. There is also no hope of recovering money through ECGC
total revenue from operations of ₹ 40 crores for the year ended on that date. The financial (Export credit Guarantee Corporation) due to certain technical issues. Debt has not been
statements of these branches have been audited by the branch auditors. written off by the client despite being communicated to client.

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(d) On reviewing file of a small finance bank, it was noticed that team has drafted following 3. considering description of issue regarding non-recoverability of export receivable of ₹3 crore
para proposed to be included under Emphasis of Matter paragraph: - from a chain of stores, which type of opinion is appropriate to be issued in audit report?
Concerns are raised regarding “Going Concern” status of the Bank. However, the Bank (a) Disclaimer of opinion
feels that it continues to remain a “Going Concern” in view of reasons stated in note 10. (b) Unmodified opinion
Our opinion is not modified in respect of this matter.” (c) Qualified opinion
(e) On reviewing file of a client, it is noticed that team was not informed about finished goods of ₹1 (d) Adverse opinion
crore lying at a location taken on rent in February 2023. The said issue was flagged at time of
Ans: (d)
reconciling inventories by the team. Hence, team could not attend physical inventory counting.
The alternative procedures cannot be performed in absence of adequate records pertaining to above
location. Total inventories reflected in financial statements is ₹ 8 crores. PBT of client is ₹10 crores. 4. As regards matter of going concern in respect of a small finance Bank, which of the following
(a) The para drafted by team is proper and in accordance with SA 570 since auditor has decided to
Based upon above, answer the following questions: -
give unmodified opinion.
1. As regards description regarding revenues generated through cash sales of a company, which
(b) The para drafted by team is proper and in accordance with SA 570 since matter has been disclosed
of the following statements is most appropriate in terms of SA 705?
in notes to accounts by bank management.
(a) Qualified opinion will be issued and basis for qualified opinion will also be provided.
(c) Instead of giving emphasis of matter paragraph, separate paragraph on ‘Material Uncertainty
(b) Adverse opinion will be issued and basis for adverse opinion will also be provided. Related to Going Concern’ in report should be given in accordance with SA 570.
(c) A disclaimer of opinion will be issued and basis for disclaimer of opinion will also be provided. (d) Separate paragraph on ‘Material Uncertainty Related to Going Concern’ under the heading
Besides, statement in audit report will be changed from “financial statements have been audited” “Emphasis of matter” paragraph in report should be given in accordance with SA 570.
to “auditor was engaged to audit financial statements.” Ans: (c)
(d) A disclaimer of opinion will be issued and basis for disclaimer of opinion will also be provided.
Besides, statement in audit report will be changed from “financial statements have been audited” 5. Regarding issue of not informing team regarding inventory of finished goods lying at a
to “financial statements have not been audited.” location taken on rent in February 2023, which type of opinion is appropriate to be issued in
Ans: (c) case of this client?
(a) Modified opinion
2. Considering litigation matter of TS Limited, which of the following statements is most (b) Qualified opinion
appropriate in this regard? (c) Unmodified opinion
(a) Unmodified opinion needs to be expressed by auditor. (d) Either Modified or Qualified opinion
(b) It amounts to non-disclosure of a material contingent liability by the company. Adverse opinion Ans: (b)
needs to be expressed by auditor.
(c) It amounts to non-disclosure of a material contingent liability by the company. Qualified opinion
needs to be expressed by auditor.
(d) The company has not made a material provision resulting in material misstatement. Adverse
opinion needs to be expressed by auditor.
Ans: (c)

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8
CHAPTER
SPECIALISED
AREAS
SA 800- Special Considerations- Audits of Financial Statements prepared in

accordance with Special Purpose Framework
Question 1
The financial statements of AKY & Co. have been prepared by management of an entity in
accordance with the financial reporting provisions of a contract (that is, a special purpose
framework) to comply with provisions of the contract. Based on the contract, management does
not have a choice of financial reporting frameworks. As an auditor advise the considerations
to be taken care while planning and performing audit? (MTP 4 Marks, Aug 18, MTP 5 Marks
March 18)
Answer 1
Considerations for Planning and Performing Audit in case of Special Purpose Framework: As
per SA 800 “Special Considerations-Audits of Financial Statements Prepared in accordance with
Special Purpose Frameworks”, financial statements prepared in accordance with a special purpose
framework may be the only financial statements an entity prepares. In such circumstances, those
financial statements may be used by users other than those for whom the financial reporting framework
is designed.
While planning and performing audit of such special purpose framework based company, the
auditor should consider below mentioned factors:
a. To obtain an understanding of the entity’s selection and application of accounting policies. In the
case of financial statements prepared in accordance with the provisions of a contract, the auditor
shall obtain an understanding of any significant interpretations of the contract that management
made in the preparation of those financial statements.
b. Compliance of all SAs relevant to audit, the auditor may judge it necessary to depart from a
relevant requirement in an SA by performing alternative audit procedures to achieve the aim of
that requirement.
c. Application of some of the requirements of the SAs in an audit of special purpose financial
statements may require special consideration by the auditor. For example, in SA 320, judgments
about matters that are material to users of the financial statements are based on a consideration
of the common financial information needs of users as a group. In the case of an audit of special
purpose financial statements, however, those judgments are based on a consideration of the
financial information needs of the intended users.
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d. In the case of special purpose financial statements, such as those prepared in accordance with the SA 810- Engagements to report on Summary Financial Statements
requirements of a contract, management may agree with the intended users on a threshold below
Question 1
which misstatements identified during the audit will not be corrected or otherwise adjusted. The
existence of such a threshold does not relieve the auditor from the requirement to determine The management of CSITA Ltd. has prepared its summary financial statements for the year
materiality in accordance with SA 320 for purposes of planning and performing the audit of the 2017 - 18 to be provided to its investors. Consequently, the company wants to appoint you
special purpose financial statements. for conducting audit of summary financial statements. What are the procedures that you will
perform and consider necessary as the basis for forming an opinion on the summary financial
e. Communication with those charged with governance in accordance with SAs is based on the
statements? (MTP 4 Marks, April 18)
relationship between those charged with governance and the financial statements subject to
audit, in particular, whether those charged with governance are responsible for overseeing the Answer 1
preparation of those financial statements. In the case of special purpose financial statements, those As per SA 810, “Engagement to Report on Summary Financial Statements”, the auditor shall perform
charged with governance may not have such a responsibility. the following procedures, and any other procedures that the auditor may consider necessary, as the
basis for the auditor’s opinion on the summary financial statements:
(i) Evaluate whether the summary financial statements adequately disclose their summarized nature
and identify the audited financial statements.
(ii) When summary financial statements are not accompanied by the audited financial statements,
evaluate whether they describe clearly:
(1) From whom or where the audited financial statements are available; or
(2) The law or regulation that specifies that the audited financial statements need not be made
available to the intended users of the summary financial statements and establishes the criteria
for the preparation of the summary financial statements.
(iii) Evaluate whether the summary financial statements adequately disclose the applied criteria.
(iv) Compare the summary financial statements with the related information in the audited financial
statements to determine whether the summary financial statements agree with or can be recalculated
from the related information in the audited financial statements.
(v) Evaluate whether the summary financial statements are prepared in accordance with the applied
criteria.
(vi) Evaluate, in view of the purpose of the summary financial statements, whether the summary
financial statements contain the information necessary, and are at an appropriate level of
aggregation, so as not to be misleading in the circumstances.
(vii) Evaluate whether the audited financial statements are available to the intended users of the
summary financial statements without undue difficulty, unless law or regulation provides that
they need not be made available and establishes the criteria for the preparation of the summary

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CA P is auditor of a company responsible for auditing complete set of financial statements. He SA 800 deals with special considerations applicable in respect of audit of financial statements
intends to express adverse opinion on complete set of financial statements considering conclusions prepared in accordance with special purpose framework Explain, by giving examples, meaning
drawn by him during course of audit. He is also auditing trade receivables of company for the of special purpose framework. (SA 800)
same period in a separate engagement. Can he express unmodified opinion in respect of trade Answer 3
receivables? If so, discuss those circumstances. (SA 805)
SA 800 defines special purpose framework as a financial reporting framework designed to meet
Answer 1 the financial information needs of specific users. The financial reporting framework may be a fair
If the auditor undertakes an engagement to report on a single financial statement or on a specific presentation framework or a compliance framework.
element of a financial statement in conjunction with an engagement to audit the entity’s complete set The requirements of the applicable financial reporting framework determine the form and content of
of financial statements, the auditor shall express a separate opinion for each engagement. the financial statements and what constitutes a complete set of financial statements.
If the auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on the Examples of Special purpose framework: -
entity’s complete set of financial statements as a whole, RevSisAed 705 does not permit the auditor to
• The cash receipts and disbursements basis of accounting for cash flow information that an entity
include in the same auditor’s report an unmodified opinion on a single financial statement that forms
may be requested to prepare for creditors.
part of those financial statements or on a specific element that forms part of those financial statements.
• The financial reporting provisions established by a regulator to meet the requirements of that
This is because such an unmodified opinion would contradict the adverse opinion or disclaimer of
regulator
opinion on the entity’s complete set of financial statements as a whole If the auditor concludes that
it is necessary to express an adverse opinion or disclaim an opinion on the entity’s complete set of • The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a
financial statements as a whole but, in the context of a separate audit of a specific element that is project grant
included in those financial statements, the auditor nevertheless considers it appropriate to express an
unmodified opinion on that element, the auditor shall only do so if
Question 4
a) The auditor is not prohibited by law or regulation from doing so;
CA Y is auditor of a company. He has expressed adverse opinion on audited financial statements.
b) That opinion is expressed in an auditor’s report that is not published together with the auditor’s
What additional points he has to keep in mind while expressing opinion on summary financial
report containing the adverse opinion or disclaimer of opinion; and
statements derived from such audited financial statements? (SA 810)
c) The specific element does not constitute a major portion of the entity’s complete set of financial statements.
Answer 4
When the auditor’s report on the audited financial statements contains a qualified opinion, an Emphasis
Question 2 of Matter paragraph, or an Other Matter paragraph, but the auditor is satisfied that the summary
financial statements are consistent, in all material respects, with or are a fair summary of the audited
List out few factors affecting auditor’s determination of the acceptability of the applied criteria
financial statements, in accordance with the applied criteria, the auditor’s report on the summary
before accepting audit of summary financial statements. (SA 810)
financial statements shall, also contain followings: -
Answer 2
(a) State that the auditor’s report on the audited financial statements contains a qualified opinion, an
Factors affecting the auditor’s determination of the acceptability of the applied criteria: Emphasis of Matter paragraph, or an Other Matter paragraph; and
• The nature of the entity (b) Describe
• The purpose of the summary financial statements (i) The basis for the qualified opinion on the audited financial statements, and that qualified opinion;
• The information needs of the intended users of the summary financial statements and or the Emphasis of Matter or the Other Matter paragraph in the auditor’s report on the audited
• Whether the applied criteria will result in summary financial statements that are not misleading in financial statements; and
the circumstances. (ii) The effect thereof on the summary financial statements, if any.

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When the auditor’s report on the audited financial statements contains an adverse opinion or a comply with the financial reporting provisions of the contract referred to above. As a result, the
disclaimer of opinion, the auditor’s report on the summary financial statements shall, additionally:- financial statements may not be suitable for another purpose. Our report is intended solely for X Ltd.
a) State that the auditor’s report on the audited financial statements contains an adverse opinion or and Y Ltd. and should not be distributed to or used by parties other than X Ltd. and Y Ltd.
disclaimer of opinion;
b) Describe the basis for that adverse opinion or disclaimer of opinion; and Question 7
c) State that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to CA M. Surya is auditor for financial statements of an entity prepared in accordance with financial
d) express an opinion on the summary financial statements reporting provisions of a contract. He is also offered audit of trade receivables appearing in
above financial statements. Can he accept such engagement? Discuss brief outline of his audit
approach in such a situation. (SA 805)
Question 5
Answer 7
CA Lalita is auditor of a company. She is also offered professional work of audit of financial
The single financial statement or the specific element, account or item of a financial statement may be
statements prepared specifically for meeting requirements of a loan agreement for the same
prepared in accordance with a general or special purpose framework. If prepared in accordance with
period. She chooses to accept work and has made up her mind to disclose this fact in “Other
a special purpose framework, SA 800 also applies to the audit.
matter Paragraph” in audit report to be issued by her for this specific engagement. Is her
approach proper? (SA 805) In the given case, financial statements of the entity are prepared in accordance with financial reporting
provisions of a contract. It is a special purpose framework. The auditor of financial statements prepared
Answer 5
in accordance with special purpose framework is also offered audit of trade receivables appearing
In the given situation, the approach of CA Lalita is proper. There is no bar upon accepting such an in above financial statements which relates to audit of element of financial statements prepared in
engagement even though she is the auditor of the company. Besides, she has intended to disclose this accordance with special purpose framework. Hence, his audit approach should include considering
fact in “Other Matter Paragraph” of the audit report to be issued by her for such specific engagement. requirements of both SA 800 and SA 805.
CA Lakshmi has prepared a draft audit report for financial statements of X Ltd. prepared in CA G is offered appointment for audit of trade payables of financial statements of a company.
accordance with financial reporting provisions of a contract with Y Ltd. She has drafted an However, financial statements prepared under Companies Act, 2013 are audited by CA Jignesh.
unmodified opinion to be given in audit report. Besides, she has also drawn attention in draft Discuss why it would be practically difficult for CA G to perform such an audit. (SA 805)
audit report to Note “A “to the financial statements which describes the basis of accounting
Answer 8
(under the heading “Basis of accounting”).
Compliance with the requirements of SAs relevant to the audit of a single financial statement or of a
How she should ensure that report would not be misused? Draft a suitable para to be included
specific element of a financial statement may not be practicable when the auditor is not also engaged
in the report for this purpose. (SA 800)
to audit the entity’s complete set of financial statements. In such cases, the auditor often does not have
Answer 6 the same understanding of the entity and its environment, including its internal control, as an auditor
SHE may consider it appropriate to indicate that the auditor’s report is intended solely for specific users. who also audits the entity’s complete set of financial statements. Accordingly, the auditor may need
further evidence to corroborate audit evidence acquired from the accounting records.
Depending on the law or regulation applicable, this may be achieved by restricting the distribution or use
of the auditor’s report. In these circumstances, the paragraph alerting the readers may be expanded to In the case of an audit of a specific element of a financial statement, certain SAs require audit work
include these other matters and the heading modified accordingly. The draft para should read as under: - that may be disproportionate to the element being audited. If the auditor concludes that an audit of a
single financial statement or of a specific element of a financial statement in accordance with SAs may
Basis of Accounting and Restriction on Distribution and Use
not be practicable, the auditor may discuss with management whether another type of engagement
Without modifying our opinion, we draw attention to Note A to the financial statements, which might be more practicable.
describes the basis of accounting. The financial statements are prepared to assist the company to
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Question 9 INTEGRATED CASE SCENARIO

CA Madhur is auditor of a company and has issued audit report dated 15th June of a particular
Liabilities Smart investment equity Smart investment equity
year. The audit report on summary financial statements derived from such audited financial
and debt fund savings fund
statements is dated 15th July of that particular year. Discuss whether there exists any additional Unit Capital 20000.00 15000.00
reporting responsibility for auditor in such a situation in respect of audit report on summary Reserve and Surplus 160000.00 80000.00
financial statements. (SA 810) Other current liabilities & provisions 100.00 100.00
Answer 9 Total 180100.00 95100.00
Assets
The audit report on summary financial statements derived from audited financial statements is dated
Investments 170000.00 90000.00
15th July of that particular year. However, the audit report on audited financial statements is dated 15th Deposits 100.00 100.00
June of that year. Other Current assets 10000.00 5000.00
In the above situation, the auditor’s report on summary financial statements should state that the Total 180100.00 95100.00
summary financial statements and the audited financial statements do not reflect the effects of events Abridged revenue account for year ended 31st March 20XX (In` Lacs)
that occurred subsequent to the date of the auditor’s report on the audited financial statements.
Income Smart investment equity Smart investment equity
and debt fund savings fund
Question 10 Income 34000.00 1000.00
Expenses and losses 3400.00 1500.00
Consider that the audit report on financial statements issued by CA Madhur for above said
Net realized gains 30600.00 (500.00)
company contains qualified opinion. Can he issue an unmodified opinion on summary financial
Add: Change in unrealized 2000.00 700.00
statements derived from audited financial statements? Discuss. (SA 810)
appreciation in value of investments
Answer 10 Net Surplus 32600.00 200.00
If the auditor is satisfied that the summary financial statements are consistent, in all material respects, Dividend appropriation 3000.00 50.00
Retained Surplus 29600.00 150.00
with or are a fair summary of the audited financial statements, in accordance with the applied criteria,
he can issue an unmodified opinion. The abridged financial statements of the Schemes of the Fund have been prepared by Board
However, when auditor’s report on audited financial statements contains a qualified opinion, the of Trustees of Fund pursuant to SEBI regulations and in accordance with format prescribed
auditor’s report on the summary financial statements shall, also contain following: by SEBI. Previous year figures have been ignored for purpose of case. Unmodified opinion has
been expressed by auditor in audited financial statements of the schemes of “Smart Investment
(a) State that the auditor’s report on the audited financial statements contains a qualified opinion
Mutual Fund” as at 31st March 20XX and for year ended 31st March, 20XX.
(b) Describe:
(i) The basis for the qualified opinion on the audited financial statements, and that qualified opinion in
1. Given the above extract of abridged financial statements and description, which the following
the auditor’s report on the audited financial statements; and
(ii) The effect thereof on the summary financial statements, if any. Hence, above points should be
(a) The auditor may presume that criteria applied by the Board of Trustees in the preparation of the
included by CA Madhur.
abridged financial statements are acceptable.
(b) The auditor cannot presume that criteria applied by the Board of Trustees in preparation of
abridged financial statements are acceptable.
(c) The abridged financial statements have been prepared by the Board of Trustees. The auditor
cannot ordinarily accept criteria applied by them for the preparation of such abridged financial
statements before detailed evaluation.

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(d) The auditor is duty bound to accept the criteria applied by the Board of Trustees in the preparation 4. Which of the following paras is most appropriate to be included under healing “Opinion” in
of abridged financial statements. auditor’s report?
Ans: (a) (a) In our opinion, the abridged financial statements, derived from the audited financial statements of
the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are a fair
summary of those financial statements, and are in accordance with the accounting policies and
2. Which of the following statements in reference to abridged financial statemen not in accordance
standards specified in SEBI regulations and generally accepted accounting principles in India to
with three querulents of SA 810?
the extent applicable.
(a) The notes to accounts should specifically disclose that these abridged financial statements have
(b) In our opinion, the abridged financial statements, as at March 31, 20XX and for the year ended
been derived from audited financial statements.
March 31, 20XX are a fair summary of those financial statements.
(b) The Board of Trustees has disclosed that audited financial statements are available on the website
(c) In our opinion, the abridged financial statements, derived from the audited financial statements
of the company.
of the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are
(c) It should be stated in the auditor’s report that abridged financial statements have been compared consistent with audited financial statements and are in accordance with the accounting policies
with the related information in the audited financial statements to determine whether the abridged and standards specified in SEBI regulations and generally accepted accounting principles in India
financial statements agree with or can be recalculated from the related information in the audited to the extent applicable.
(d) In our opinion, the abridged financial statements, derived from the audited financial statements
(d) It should be stated in auditor’s report that reading the abridged financial statements is not a of the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are
substitute for reading the audited financial statements of the Schemes of the Fund. consistent with audited financial statements
Ans: (c) Ans: (a)
3. Which of the following paras is most appropriate to be included under heading “Auditor’s 5. Which of the following is usually nonelement of audit report on abridged finance statements
responsibility” in the auditor’s report? in accordance with SA 810?
(a) Our responsibility is to express an opinion on the Abridged financial statements based on our (a) Emphasis of matter paragraph.
procedures, which were conducted in accordance with Standards on Auditing issued by the
(b) Other matter paragraph.
Institute of Chartered Accountants of India.
(c) Management’s responsibility for abridged financial statements.
(b) Our responsibility is to express an opinion on the Abridged financial statements based on
our procedures, which were conducted in accordance with Standard on Auditing (SA) 810, (d) Key audit matters.
“Engagements to Report on Summary Financial Statements” issued by the Institute of Chartered Ans: (d)
(c) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with Standards on Auditing adapted in
circumstances including (SA) 810, “Engagements to Report on Summary Financial Statements”
issued by the Institute of Chartered Accountants of India.
(d) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with SEBI regulations and Standards on Auditing
adapted in circumstances including (SA) 810, “Engagements to Report on Summary Financial
Statements” issued by the Institute of Chartered Accountants of India.
Ans: (b)

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9
CHAPTER
RELATED
SERVICES
SRS 4400- Engagements to perform agreed upon procedures regarding

Financial Information
Question 1
CA P is the auditor of Master Data Ltd. for the year 2021-22. The company requests the auditor
to undertake an exercise involving only verification of trade receivables for half year ending
30th September 2021. The company wants to be satisfied that trade receivables are properly
confirmed and reconciled.
In this regard, CA P has to verify the arithmetical accuracy of trade receivables, obtain
confirmation of trade receivables and ensure verification of proper reconciliations with
confirmations.
He is in a dilemma as to whether he can give a report providing assurance to the company in this
respect. Guide CA P with reasoning. Assume that above exercise can be undertaken and there is
no legal bar. (RTP May ’23)
Answer 1
In the given case situation, auditor has to verify trade receivables for half year ending 30th
September,2021. Such a process/exercise is only a fact finding and reporting exercise. The auditor
has to report the facts as these are. Like, he would have to state whether confirmation from a particular
debtor has been received or not.
The auditor can issue an assurance report in case of audit and review engagements. By providing
assurance, the auditor provides comfort to users of financial statements. Assurance in the above
context refers to the auditor’s satisfaction as to the reliability of an assertion made by one party for
use by another. To provide such assurance, the auditor assesses the evidence collected as a result of
procedures conducted and expresses a conclusion. The degree of satisfaction achieved and, therefore,
the level of assurance which may be provided is determined by the procedures performed and their
results.
However, the types of services described in the given situation falls in the related services domain.
These are, in the nature, of agreed-upon procedures to be carried out by the auditor. The auditor
cannot issue an assurance report while providing such kind of services. He can only issue a report
stating facts as they are without providing any sort of assurance. He can report only facts.
Therefore, the auditor cannot give a report providing assurance for such type of services. He can only
issue a factual report.
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RELATED SERVICES RELATED SERVICES
SRS 4410- Compilation Engagements Question 1
Question 1 List out few intended purposes of a “compilation engagement.” (SRS 4410)
Your engagement team member, Mr. Shyam, is engaged as practitioner for compilation of Answer 1
historical financial information of Rama Ltd.
engagement may be required for various purposes including-

For management or those charged with governance,
You as a senior audit engagement team in-charge, you are required to examine the practitioner’s
Financial information that is the subject of a compilation

prepared on abasis appropriate for their particular
responsibilities as he is engaged to assist management with the preparation and presentation of purposes (such as preparation of financial information
for internal use).
historical financial information without obtaining any assurance on that information. (MTP 4 To comply with mandatory periodic
Marks, March 18) finance reporting requirements
established in law or regulation, if
Answer 1 any or
For periodic financial reporting undertake for external
As per SRS 4410 “Compilation Engagements”, the engagement partner shall take responsibility for- parties under a contract or other form of agreement
(such as financial information provided to a funding
(i) The overall quality of each compilation engagement to which that partner is assigned; and body to support provisioner or continuation of a grant).
For purposes unrelated to mandatory
(ii) The engagement being performed in accordance with the firm’s quality control policies and financial reporting under relevant law
or regulation, including for example
procedures, by:
For transactional purposes, for example to support a
(1) Following appropriate procedures regarding the acceptance and continuance of client relationships transaction involving changes to the entity’s ownership
and engagements; or financing structure (such as for a merger or
acquisition).
(2) Being satisfied that the engagement team collectively has the appropriate competence and
capabilities to perform the compilation engagement;
Question 2
(3) Being alert for indications of non-compliance by members of the engagement team with relevant
A Chartered Accountant is offered appointment for a compilation engagement to be performed
ethical requirements, and determining the appropriate action if matters come to the engagement
under SRS 4410. Is he required to comply with ethical requirements of Code of Ethics? Discuss
partner’s attention indicating that members of the engagement team have not complied with
briefly. (SRS 4410)
relevant ethical requirements;
Answer 2
(4) Directing, supervising and performing the engagement in compliance with professional standards
and applicable legal and regulatory requirements; and The practitioner shall comply with relevant ethical requirements. In complying with the Code of
Ethics, threats to the practitioner’s compliance with relevant ethical requirements are required to be
(5) Taking responsibility for appropriate engagement documentation being maintained.
identified and appropriately addressed.
Being in nature of non-assurance engagement, independence requirements do not apply to compilation
engagements. However, laws or regulations may specify requirements or disclosure rules pertaining
to independence
Question 3
How do “related services” differ from assurance engagements? (4400)
Answer 3
“Assurance engagement” means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria. It means that

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the practitioner gives an opinion about specific information due to which users of information are able A compilation engagement is not an assurance engagement. A compilation engagement does not require
to make confident decisions knowing well that chance of information being incorrect is diminished. the practitioner to verify the accuracy or completeness of the information provided by management
Not all engagements performed by practitioners are assurance engagements. Other frequently for the compilation, or otherwise to gather evidence to express an audit opinion or a review conclusion
performed engagements which do not meet the definition of assurance engagements include- on the preparation of the financial information.
• The preparation of tax returns where no conclusion conveying assurance is expressed. • The practitioner shall obtain an understanding of the following matters sufficient to be able to
perform the compilation engagement: -
• Consulting (or advisory) engagements such as management and tax consulting.
a) The entity’s business and operations, including the entity’s accounting system and accounting
• Engagements covered by Standards for Related Services, such as agreed-upon procedures
records and
engagements and compilations of financial or other information.
b) The applicable financial reporting framework, including its application in the entity’s industry.
• The practitioner shall compile the financial informant using the records, documents, explanations
Question 4 and other information, including significant judgments, provided by management.
Discuss main documentation requirements to be taken care of by a practitioner while performing • The practitioner shall discuss with management, or those charged with governance appropriate,
a compilation engagement under SRS 4410. those significant judgments, for which the practitioner has provided assistance in the course of
Answer 4 compiling the financial information.
The practitioner shall include in the engagement documentation • Prior to completion of the compilation engagement, the practitioner shall read the compiled
financial information in light of the practitioner’s understanding of the entity’s business and
(a) Significant matters arising during the compilation engagement and how those matters were
operations, and of the applicable financial reporting framework.
addressed by the practitioner
• If, in the course of the compilation engagement, the practitioner becomes aware that the records,
(b) A record of how the compiled financial information reconciles with the underlying records,
documents, explanations or other information, including significant judgments, provided
documents, explanations and other information, provided by management and
by management for the compilation engagement are incomplete, inaccurate or otherwise
(c) A copy of the final version of the compiled financial information for which management or unsatisfactory, the practitioner shall bring that to the attention of management and request the
those charged with governance, as appropriate, has acknowledged their responsibility, and the additional or corrected information.
practitioner’s report.
• If the practitioner is unable to complete the engagement cause management has failed to provide
The practitioner may consider also including in the engagement documentation a copy of the entity’s records, documents, explanations or other information, including significant judgments, as
trial balance, summary of significant accounting records or other information that the practitioner requested, the practitioner shall withdraw from the engagement and inform management and
used to perform the compilation. those charged with governance of the reasons for withdrawing.
• If the practitioner becomes aware during the course of the engagement that: -
Question 5 (a) The compiled financial information does not adequately refer to or describe the applicable
CA. P has been appointed to compile the financial information oLfimX ited. CA P is confused financial reporting framework
whether he should apply the same procedures which are required to be applied to conduct an (b) Amendments to the compiled financial information are required for the financial information not
audit or there are some other procedures to discharge the duties under such an engagement. to be materially misstated; or
Define the characteristics Compilation Engagemen.t What should be the approach of CA P for
(c) The compiled financial information is otherwise misleading, the practitioner shall propose the
performing the Engagement? (4410)
appropriate amendments to management.
Answer 5
• If management declines, or does not permit the practitioner to make the proposed amendments
Compilation engagement is an engagement in which a practitioner applies accounting and financial to the compiled financial information, the practitioner shall withdraw from the engagement and
reporting expertise to assist management in the preparation and presentation of financial information inform management and those charged with governance of the reasons for withdrawing.
of an entity in accordance with an applicable financial reporting framework and issues a report.
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• If withdrawal from the engagement is not possible, the practitioner shall determine the professional Question 7
and legal responsibilities applicable in the circumstances. During the course of performing a compilation engagement in accordance with SRS 4410, it
• The practitioner shall obtain an acknowledgement from management or those charged with becomes known to you that client had suffered a theft loss of `100 lacs of its inventories over a
governance, as appropriate, that they have taken responsibility for the final version of the compiled period of time at a storage location visited infrequently. A claim was lodged by the client with
financial information. insurance company which was repudiated due to certain technical reasons relating to coverage
of policy. The client has not preferred a complaint or an appeal against said repudiation. The
amount is reflected under the head “current assets” in trial balance of the client. Discuss, how
Question 6 you should proceed to deal with the matter? (4410)
A company asks you to carry out process of confirmation of its accounts receivables having Answer 7
balances in excess of `10 lacs as per its books of accounts at the close of the year. The work
In this instant case, amount of `100 lacs is reflected under the head “current assets” in trial balance.
to be performed only involves preparing and sending confirmation requests to such parties,
Since client’s claim has been repudiated and no appeal has been preferred, it is a loss for the client and
analysis of variations on receipt of confirmations and submission of a report in accordance with
should be dealt accordingly. Therefore, amendments are required for the financial information not to
professional standards. What points have to be kept in mind for inclusion in report specifically
be materially misstated.
for such engagement? (4400)
If the practitioner becomes aware during the course of the engagement that amendments to the compiled
Answer 6
financial information are required for the financial information not to be materially misstated or the
The described engagement is an agreed-upon procedures engagement. Following points have to be compiled financial information is otherwise misleading, the practitioner shall propose the appropriate
kept in mind for being included in the report: - amendments to management.
• A statement that the procedures performed were those agreed-upon with recipient If management declines, or does not permit the practitioner to make the proposed amendments to
• A statement that the engagement was performed in accordance with the Standard on Related the compiled financial information, the practitioner shall withdraw from the engagement and inform
Services applicable to agreed-upon procedures engagements management and those charged with governance of the reasons for withdrawing.
• Identification of the purpose for which the agreed-upon procedures were performed If withdrawal from the engagement is not possible, the practitioner shall determine the professional
and legal responsibilities applicable in the circumstances.
• A listing of the specific procedures performed
• A description of the auditor’s factual findings including sufficient details of errors and exceptions
found INTEGRATED CASE SCENARIO
• A statement that the procedures performed do not constitute either an audit or a review and, as KM Limited has engaged your firm for compilation of financial statements in accordance with
such, no assurance is expressed requirements of SRS 4410. You also come to know that company is setting up a new unit in
• A statement that had the auditor performed additional procedures, an audit or a review, other Rourkela, Odisha. The company management has provided you with draft trial balance and
matters might have come to light that would have been reported requires assistance in preparation and presentation of its financial statements for year ended 31st
March, 2023. The management requires such a preparation and presentation for its internal use.
• A statement that the report is restricted to those parties that have agreed to the procedures to be
performed During the course of engagement, it is noticed that: -
• A statement that the report relates only to the elements, accounts, items or financial and nonfinancial 1) There are apparent errors in few opening balances brought forward from previous year relating
information specified and that it does not extend to the entity’s financial statements taken as a to some outstanding incentives receivable from government authorities. These have been
whole swapped with some other balances in trial balance. However, there are no credit transactions in
such incentive accounts or accounts whose balances have been swapped during the year.
2) One of the team members suggests that it is one of the duties to ensure that revenue figures
stated in trial balance, at least, are verified to ensure that all revenues required to be booked
by the company have, in fact, been booked.
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3) It is also suggested by this team member that even though it is a compilation engagement, 3. In view of the team member’s suggestion relating to adherence to appropriate Standards for
quality control aspects like adhering to appropriate Standards needed to be followed. quality control, which of the following statements is relevant in context of above said engagement?
4) Before signing and issuing report under SRS 4410, you once again read the financial (a) SA 220 is applicable in this engagement and has to be followed by the engagement partner
information. meticulously.
It comes to your notice that figures relating to setting up of a new unit of the company (b) SQC 1 is applicable in this engagement.
coming up in Rourkela in Odisha have not been properly disclosed in compiled financial (c) Both SA 220 and SQC 1 are applicable in this engagement.
statements. The expenditure was incurred from a bank account maintained in Rourkela
(d) SA 220 and SQC 1 are not applicable in this engagement. However, SRS 4410 lays down detailed
and was omitted to be shown under appropriate heads. You are vacillating regarding above
quality control requirements for such type of engagement.
considering scope of compilation engagement.
Ans: (b)
5) The team has prepared detailed documentation during the course of engagement.
4. Which of the following statements is most appropriate as regards omission of expenditure

under appropriate heads pertaining to the Rourkela unit in compiled financial statements?
1. In respect of errors in some of opening balances noticed as described in case, which of the
(a) The above-noted omission can be misleading. By disregarding such an omission, the fundamental
following statements is most appropriate?
principle of integrity is violated and engagement cannot be performed in accordance with ethical
(a) Such errors should straight away lead to the qualification of a report to be issued. requirements.
(b) Such errors should be brought to the knowledge of management. (b) The above-noted omission can be misleading. By disregarding such an omission, the fundamental
(c) Knowledge of such type of errors has no effect on compliance of ethical requirements by the firm. principle of objectivity is violated and engagement cannot be performed in accordance with ethical
(d) The above said matter relates to SA 510 Initial Audit Engagements-Opening Balances and has no requirements.
effect on reporting obligations in a compilation engagement. (c) The above noted omission has no effect on performing such compilation engagement.
Ans: (b) (d) The above-noted omission has no effect on performing and issuing reports under such compilation
engagement.
2. As regards the suggestion of one of the team members regarding the verification of all revenues Ans: (a)
of the company, which of the following statements is most appropriate?
(a) Suggestion of team member is proper as such verification is part and parcel of such an engagement. 5. The detailed documentation is maintained during the course of compilation engagement. Which
(b) Suggestion of team member is proper as the absence of such verification may make financial of the following statements is most appropriate regarding assembly of the final engagement file?
statements misleading. a) Final engagement file should be assembled in not more than 60 days after the date of the report.
(c) Suggestion of team member is not proper as verifying the accuracy or completeness of the b) Final engagement file should be assembled in not more than 120 days after the date of the report.
information provided by management is not required in such engagement. c) Final engagement file should be assembled on a timely basis after the engagement report has been
(d) Suggestion of team member is not proper as compliance with qualitative requirements is not finalized in accordance with the time limits set by the firm.
required in such engagement. d) There is no requirement of assembling of final engagement file in a compilation engagement
Ans: (c) Ans: (c)

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RELATED SERVICES
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10
CHAPTER
REVIEW OF
FINANCIAL
INFORMATION
Question 1
Discuss why “inquiry” is important as an audit procedure in an engagement to review financial
statements. (SRE 2400)
Answer 1
Inquiry: In a review, inquiry includes seeking information from management and other persons
within the entity, as the practitioner considers appropriate in the engagement circumstances.
Inquiries may include matters such as those relating to making of accounting estimates, identification
of related parties, about significant, complex or unusual transactions, existence of any actual, suspected
or alleged fraud, events occurring between the date of the financial statements and practitioner’s report,
basis for management’s assessment of the entity’s ability to continue as a going concern, events or
conditions that appear to cast doubt on the entity’s ability to continue as a going concern, material
commitments, contractual obligations or contingencies that have affected or may affect the entity’s
financial statements including disclosures and material non-monetary transactions or transactions for
no consideration in the financial reporting period under consideration.
The practitioner may also extend Inquiries to obtain non-financial data if appropriate. Evaluating the
responses provided by the management is integral to the inquiry process.
Depending on the engagement circumstances, inquiries may also include inquiries about:
• Actions taken at meetings of owners, those charged with governance and committees thereof, and
proceedings at other meetings, if any, that affect the information and disclosures contained in the
• Communications the entity has received, or expects to receive or obtain, from regulatory agencies.
• Matters arising in the course of applying other procedures.
When performing further inquiries in relation to identified inconsistencies, the practitioner considers
the reasonableness and consistency of management’s responses in light of the results obtained from
other procedures, and the practitioner’s knowledge and understanding of the entity and the industry
in which it operates.
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REVIEW OF FINANCIAL INFORMATION REVIEW OF FINANCIAL INFORMATION
CA. Aditya Jain is auditor of a listed company. He is also required to carry out quarterly review What is significance of “date of report in” a review report? (SRE 2400)
of financial statements of company in terms of regulatory requirements is He already well Answer 3
versed with business of company and has deep understanding of the company. Discuss, any
The date of the practitioner’s repo: the practitioner shall date the report no earlier than the date on
five procedures, by which he can update his understanding of the company for carrying out
which the practitioner has obtained sufficient appropriate evidence as the basis for the practitioner’s
quarterly review. (SRE 2410)
conclusion on the financial statements, including being satisfied that: -
Answer 2
(1) All the statements that comprise the financial statements under the applicable financial reporting
Some of the procedures performed by the auditor to update the understanding of the entity and its framework, including the related notes where applicable, have been prepared and
environment, including its internal control, ordinarily include the following
(2) Those with the recognized authority have asserted that they have taken responsibility for those
• Reading the documentation, to the extent necessary, of the preceding year’s audit and reviews financial statements.
of prior interim period(s) of the current year and corresponding interim period(s) of the prior
year, to enable the auditor to identify matters that may affect the current-period interim financial
information. Question 4
• Considering any significant risks, including the risk of management override of controls, that were CA. Pankaj Chaturvedi has issued a review report dated 28.7.2022 for financial results of a
identified in the audit of the prior year’s financial statements. company for quarter ending 30.6.2022. Describe his responsibility, if any, for events occurring
• Reading the most recent annual and comparable prior period interim financial information. from 1.7.2022 till date of review report in accordance with SRE 2410.
• Considering materiality with reference to the applicable financial reporting framework as it relates Answer 4
to interim financial information to assist in determining the nature and extent of the procedures to The auditor should inquire whether management has identified all events up to the date of the review
be performed and evaluating the effect of misstatements. report that may require adjustment to or disclosure in the interim financial information.
• Considering the nature of any corrected material misstatements and any identified uncorrected
immaterial misstatements in the prior year’s financial statements.
Question 5
• Considering significant financial accounting and reporting matters that may be of continuing
Roma Limited has entered into a contract with Dorma Limited. There is a condition in the
significance such as material weaknesses in internal control.
contract by virtue of which Roma Limited is required to get its financial statements reviewed for
• Considering the results of any audit procedures performed with respect to the current year’s financial a year on a quarterly basis in accordance with the financial reporting provisions of the contract.
statements. Can Roma Limited get its financial statements reviewed from a professional accountant in
• Considering the results of any internal audit performed and the subsequent actions taken by the practice?
management. Answer 5
• Inquiring of management about the results of management’s assessment of the risk that the interim The above financial statements are prepared in accordance with special purpose framework in
financial information may be materially misstated as a result of fraud. accordance with requirements of a contract. Financial statements prepared in accordance with special
• Inquiring of management about the effect of changes in the entity’s business activities. purpose framework can also be reviewed by a professional accountant in practice and review report
may be issued in accordance with SRE 2400.
• Inquiring of management about any significant changes in internal control and the potential effect
of any such changes on the preparation of interim financial information.
• Inquiring of management of the process by which the interim financial information has been
prepared and the reliability of the underlying accounting records to which the interim financial
information is agreed or reconciled.

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You are conducting a review of the financial statements of a company. It is gathered upon inquiry CA. Seerat is conducting review of the quarterly financial information of a company of which she
that there is a possibility of material misstatements in financial statements. Discuss, how you is also auditor. She believes that it is necessary to make a material adjustment to the quarterly
would proceed further in the matter under SRE 2400. financial information for it to be prepared, in all material respects, in accordance with the
Answer 6 applicable financial reporting framework. She has communicated the matter to CFO and audit
committee. However, no response was received even after waiting for a reasonable time. What
If the practitioner becomes aware of matters that causes the practitioner to believe the financial
are the options available to her?
statements may be materially misstated, the practitioner shall design and perform additional procedures
sufficient to enable the practitioner to: - Answer 8
a) Conclude that the matter(s) is not likely to cause the financial statements as a whole to be materially In such a case, options available to her in accordance with SRE 2410 are: -
misstated or a) Whether to modify the report or
b) Determine that the matter(s) causes the financial statements as a whole to be materially misstated. b) The possibility of withdrawing from the engagement and
Additional procedures focus on obtaining sufficient appropriate evidence to enable the practitioner c) The possibility of resigning from the appointment to audit the annual financial statements.
to form a conclusion on matters that the practitioner believes may cause the financial statements to
be materially misstated. The procedures may be:
• Additional inquiry or analytical procedures, for example, being performed in greater detail or Integrated Case Scenario
being focused on the affected items (i.e., amounts or disclosures concerning the affected accounts Below is given an incomplete draft text of the review report on the review of financial results
or transactions as reflected in the financial statements); or of Fast Operations Limited, a listed company in accordance with SEBI regulations. The review
• Other types of procedures, for example, substantive test of details or external confirmations. is a compulsory requirement under SEBI (Listing Obligations and Disclosure Requirements)
Regulations. The incomplete areas of the report have been marked as XXXX.
INDEPENDENTAUDITOR’S REVIEW REPORT ON REVIEW OF INTERIM STANDALONE
Question 7 FINANCIAL RESULTS TO XXXX
During review of quarterly results of a company of which you are auditor, it is gathered on 1. We have reviewed the accompanying Statement of Standalone unaudited financial results of
inquiries made that there has been a major fire in fabric processing plant of the company Fast Operations Limited (“the Company”), for the quarter and six months ended September
during the quarter. It has resulted in massive disruption in operations of the company. Worse 30, 2022 (“the Statement”), being submitted by the Company pursuant to the requirement of
still, machinery and inventories of plant were uninsured due to carelessness of concerned staff Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations,
leading to substantial losses. The matter has been disclosed in interim financial information 2015, as amended.
appropriately. Discuss, how you would proceed to deal with the same in review report?
2. This Statement, which is the responsibility of the Company’s Management and approved by
Answer 7 the Company’s Board of Directors, has been prepared in accordance with the recognition and
Uninsured assets in a disaster are examples of events or conditions that, individually or collectively, measurement principles laid down in the Indian Accounting Standard 34 “Interim Financial
may cast significant doubt about the going concern assumption. As a result of fire, there is massive Reporting” (“Ind AS 34”), prescribed under Section 133 of the Companies Act, 2013 read
disruption in operations of the company. Besides, the company would have to bear losses as its with relevant rules issued thereunder and other accounting principles generally accepted in
damaged assets are uninsured. India. Our responsibility XXXXXXXXXXX.
In accordance with SRE 2410, if, as a result of inquiries or other review procedures, a material uncertainty 3. We conducted our review of the Statement in accordance with the Standard XXXX, issued
relating to an event or condition comes to the auditor’s attention that may cast significant doubt on the by the Institute of Chartered Accountants of India (ICAI). A review of interim financial
entity’s ability to continue as a going concern, and adequate disclosure is made in the interim financial information consists of making inquiries, primarily of the company’s personnel responsible
information, the auditor modifies review report by adding an emphasis of matter paragraph. for financial and accounting matters, and applying analytical and other review procedures.
Therefore, Emphasis of matter paragraph should be added in review report. A review is substantially XXXXXXXXXXXXXXXXXXXXXXX.

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4. Based on our review conducted as stated in paragraph 3 above, XXXXXXXXXXXXXXXXXX not enable us to obtain assurance that we would become aware of all significant matters that might
Using your knowledge, answer the following questions to complete the draft text of review be identified in a review. Accordingly, we do not express an audit opinion.
report of Fast Operations Limited- b) A review is substantially broader in scope than an audit conducted in accordance with Standards
on Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does
1. The name of addressee is missing from text of draft review report. Identify the appropriate not enable us to obtain assurance that we would become aware of all significant matters that might
option: be identified in an audit. Accordingly, we do not express an audit opinion.
a) Audit Committee c) A review is substantially narrower in scope than an audit conducted in accordance with Standards
b) Board of Directors
not enable us to obtain assurance that we would become aware of all significant matters that might
c) CFO be identified in a review. Accordingly, we do not express an audit opinion
d) Stock exchange on which shares of company are listed d) A review is substantially less in scope than an audit conducted in accordance with Standards on
Ans: (b) Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
2. Under para 2 of the case study, choose the appropriate sentence beginning with “Our
Ans: (d)
responsibility XXXX”:
a) Our responsibility is to express an opinion on the Statement based on our review.
5. Complete the paragraph 4 of case study from following options: -
b) Our responsibility is to express a conclusion on the Statement based on our review.
a) Nothing has come to our attention that causes us to believe that the accompanying Statement,
c) Our responsibility is to provide a reasonable assurance on the Statement based on our review.
prepared in accordance with the recognition and measurement principles laid down in the aforesaid
d) Our responsibility is to express a compliance statement on the Statement based on our review. Indian Accounting Standard and other accounting principles generally accepted in India, has not
Ans: (b) disclosed the information required to be disclosed in terms of Regulation 33 of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the manner
in which it is to be disclosed, or that it contains any material misstatement.
3. Given the description of case study which of the following engagement standards is most
b) Nothing has come to our attention that causes us to believe that the accompanying Statement,
appropriate to be stated in para 3?
prepared in accordance with the recognition and measurement principles laid down in the aforesaid
a) SRE 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the Indian Accounting Standard and other accounting principles generally accepted in India, has
Entity’. disclosed the information required to be disclosed in terms of Regulation 33 of the SEBI (Listing
b) SRE 2400 Engagements to Review Historical Financial Statements. Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the manner
in which it is to be disclosed, or that it does not contain any material misstatement.
c) SA 700 Forming an Opinion and Reporting on Financial Statements.
c) The accompanying Statement, prepared in accordance with the recognition and measurement
d) SA 810 Engagements to Report on Summary Financial Statements.
principles laid down in the aforesaid Indian Accounting Standard and other accounting principles
Ans: (a) generally accepted in India, has disclosed the information required to be disclosed in terms of
Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015,
as amended, including the manner in which it is to be disclosed, or that it does not contain any
4. Which of the following statements is most appropriate to be inserted in sentence beginning
material misstatement.
with“ A review is substantially XXXX” in para 3?
d) The accompanying Statement, prepared in accordance with the recognition and measurement
a) A review is substantially broader in scope than an audit conducted in accordance with Standards
principles laid down in the aforesaid Indian Accounting Standard and other accounting principles
generally accepted in India, has disclosed the information required to be disclosed in terms of
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Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015,
as amended, including the manner in which it is to be disclosed, or that it does not contain any
material misstatement and gives a true and fair view of the state of affairs of the company as on
date of interim financial statements.
Ans: (a)

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REVIEW OF FINANCIAL INFORMATION
CA Harshad Jaju
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11
CHAPTER
PROSPECTIVE FINANCIAL
INFORMATION AND
OTHER ASSURANCE
SERVICES
SAE 3400- Examination of Prospective

Financial Information
Question 1
MIM & Co. wants to issue a prospectus, to provide potential investors with information about
future expectations of the Company. You are hired by MIM & Co. to examine the projected
financial statements and give report thereon. What audit evidence will be obtained for reporting
on projected financial statements? (MTP 4 Marks, Oct 18, RTP May’18) (New SM)
Answer 1
Audit evidence to be obtained for Reporting on Projected Financial Statements: The auditor should
document matters, which are important in providing evidence to support his report on examination of
prospective financial information, and evidence that such examination was carried out.
The audit evidence in form of working papers will include:
1. the sources of information,
2. basis of forecasts,
3. the assumptions made in arriving the forecasts,
4. hypothetical assumptions, evidence supporting the assumptions,
5. management representations regarding the intended use and distribution of the information,
completeness of material assumptions,
6. management’s acceptance of its responsibility for the information,
7. audit plan,
8. the nature, timing and extent of examination procedures performed, and,
9. in case the auditor expresses a modified opinion or withdraws from the engagement, the reasons
forming the basis of such decision.
Question 4
You are engaged by M/s Active Ltd. to examine and report on prospective financial information
which the management of the company has prepared for presentation at an Investor meet
program organized by a State Government to attract investment in their state. The company
in its vision document descripted various plans and proposals of the company with projected
CA Harshad Jaju
98812 92971
PROSPECTIVE FINANCIAL INFORMATION AND OTHER ASSURANCE SERVICES PROSPECTIVE FINANCIAL INFORMATION AND OTHER ASSURANCE SERVICES
financial goals and means to achieve the same and various benefits accruing to the economic Question 1
development of the State. Ayurda Ltd.is a fast growing and award-winning SaaS software company which is headquartered
What important matters will be considered by you while determining the nature, timing and in Mumbai.
extent of examination procedure to be applied in the review of the same? (PYP 5 Marks, May It also has offices in the UK and provides cloud base professional services automation (PSA)
2019) (New SM) software solutions to professional services organizations around the world. They want to engage
Answer 4 you to provide assurance report for one of its major clients over the controls it operates as a
Examination Procedures: As per SAE3400, “The Examination of Prospective Financial Information”, service organization. Can you provide such an assurance report? (SAE 3402)
when determining the nature, timing and extent of examination procedures, the auditor should consider Answer 1
matters such as: SAE 3402 applies only when the service organization is responsible for, or otherwise able to make an
(i) The knowledge obtained during any previous engagements; assertion about, the suitable design of controls. It does not deal with assurance engagements
(ii) Management’s competence regarding the preparation of prospective financial information; (a) To report only on whether controls at a service organization operated as described or
(iii) the likelihood of material misstatement; (b) To report only on controls at a service organization other than those related to a service that is
(iv) the extent to which the prospective financial information is affected by the management’s likely to be relevant to user entities’ internal control as it relates to financial reporting (for example,
judgment; controls that affect user entities’ production or quality control).
(v) the sources of information considered by the management for the purpose, their adequacy, Hence Yes, we can provide such an Assurance Report.
reliability of the underlying data, including data derived from third parties, such as industry
statistics, to support the assumptions;
Question 2
(vi) the stability of entity’s business; and
Discuss the significance of Pro forma financial information included in prospectus of a company.
(vii) the engagement team’s experience with the business and the industry in which the entity operates
Answer 2
and with reporting on prospective financial information.
Pro forma financial information refers to financial information shown together with adjustments to
illustrate the impact of an event or transaction on unadjusted financial information as if the event
had occurred or the transaction had been undertaken at an earlier date selected for purposes of the
illustration.
The Pro forma financial information is, normally, used in the offer documents to demonstrate the
effect of a transaction on the financial statements of a company as if those transactions had occurred
at an earlier date.
The Pro forma financial information may take the form of Statement of Profit and Loss and Balance
Sheet to illustrate how the transactions might have affected the assets, liabilities and earnings of the
Issuer. They also include notes in relation to the significant aspects of the transactions, assumptions
used to prepare the Pro forma financial information and the adjustments made.
Question 3
Discuss the term “Pro forma adjustment” under SAE 3420.

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Answer 3 Answer 5
In relation to unadjusted financial information, Pro forma adjustments include In such types of engagements, it is the duty of a professional accountant to see that prospective financial
(a) Adjustments to unadjusted financial information that illustrate the impact of a significant event or information is based on a consistent basis with historical financial statements using appropriate
transaction as if the event had occurred or the transaction had been undertaken at an earlier date accounting principles.
selected for purposes of the illustration and In the case of a company, historical financial statements are prepared considering the requirements
(b) Adjustments to unadjusted financial information that are necessary for the pro forma financial of the Companies Act, and depreciation is calculated accordingly. However, in the given situation,
information to be compiled on a basis consistent with the applicable financial reporting framework depreciation has been calculated in accordance with Income Tax Act which is not consistent with
of the reporting entity and its accounting policies under that framework. historical financial statements.
Therefore, it is not proper.
The fact that the projection has not been prepared on a consistent basis with the historical financial
Question 4
statements, using appropriate accounting principles needs to be stated.
Discuss, how, a Chartered Accountant can be associated with prospective financial information
Further, when presentation and disclosure are not adequate, a qualified or adverse opinion should be
without violating relevant provisions of the Chartered Accountants Act, 1949 (SAE 3400)
given or withdrawal from engagement should be made as appropriate.
Answer 4
Traditionally, the attest function performed by a Chartered Accountant in practice has been in relation
to “historical financial information”. Recognizing the professional skill and competence of Chartered Question 6
accountants, varied stakeholders like banks, financial institutions and prospective investors intend Bansi Group is a leading institution running prestigious post graduate courses in the field of management.
to place greater reliance on reports of projected cash flow and profitability statements examined and Its financial statements are audited by an independent auditor. Before the start of this academic
signed by Chartered accountants. session, the Board of the institution had outsourced its entire process of inviting student
Clause 3 of the Second Schedule to the Chartered Accountants Act, 1949 states that that a chartered applications, submission of applications, and collection of application fees including late fees
accountant in practice shall be deemed to be guilty of professional misconduct, if he permits his name and such matters to Easy Solutions Limited.
or the name of his firm to be used in connection with an estimate of earnings contingent upon future The auditors of Bansi Group want to be sure about the design and operating effectiveness of
transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast. controls at Easy Solutions Limited. What should be the nature of the report to be provided by
The above clause does not preclude Chartered accountant from associating his name with prospective auditors of Easy Solutions Limited specifically for use by Bansi Group and its auditors in this
financial statements. A chartered accountant can participate in the preparation of profit or financial regard in terms of SA 3402?
forecasts and can review them, provided he indicates clearly in his report the sources of information,
Answer 6
the basis of forecasts and also the major assumptions made in arriving at the forecasts and so long as
he does not vouch for the accuracy of the forecasts. In such a case, the auditors of Bansi Group want to be sure about the design and operating effectiveness
of controls at the organization which is providing services to their client. Type 2 report is a report on
The same also applies to projections made on the basis of hypothetical assumptions about future
the description, design and operating effectiveness of controls operating at the service organization.
events and management actions which are not necessarily expected to take place so long as vouching
Auditors of Easy Solutions Limited should provide such a report giving assurance on these matters. It
for the accuracy of the projection is not made.
should also include details of tests of controls performed and details of deviations, if any.
Question 5
Question 7
A company has approached CA. Hemant for an assurance report in respect of prospective financial
The management of S Ltd. requests you to accept an engagement to report on the compilation of
information of a project. On going through the project details, it is noticed that depreciation
pro forma financial information to be included in a prospectus. In light of SAE 3420, what factors
reflected on proposed fixed assets to be acquired in prospective financial information has been
you will consider regarding the company acknowledging and understanding its responsibility in
calculated in accordance with provisions of the Income Tax Act. No disclosure is made in this
this matter before accepting engagement?
respect too. How the matter should be proceeded with?
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Answer 7 The projection has been prepared using a set of assumptions that include hypothetical
The company’s responsibility has to be acknowledged for the following matters: - assumptions about future events and management’s actions that are not necessarily expected to
occur.
(i) Adequately disclosing and describing the applicable criteria to the intended users if these are not
publicly available We have carried out our examination of the prospective financial information thoroughly.
(ii) Compiling the pro forma financial information on the basis of the applicable criteria and Further, in our opinion the projection is properly prepared on the basis of the assumptions as
set out in Note 1 to 50 to the Prospective Financial Information and on a consistent basis with
(iii) Providing the practitioner with: -
the historical financial statements, using appropriate accounting principles. Even if the events
a) Access to all information (including, when needed for purposes of the engagement, information anticipated under the hypothetical assumptions described above occur, actual results are still
of the acquiree(s) in a business combination), such as records, documentation and other material, likely to be different from the projection since other anticipated events frequently do not occur
relevant to evaluating whether the pro forma financial information has been compiled, in all as expected and the variation may be material.
material respects, on the basis of the applicable criteria
For PCK & Co.
b) Additional information that the practitioner may request from the responsible party for the
Chartered Accountants
purpose of the engagement
Signature
c) Access to those within the entity and the entity’s advisors from whom the practitioner determines
it necessary to obtain evidence relating to evaluating whether the pro forma financial information Designation
has been compiled, in all material respects, on the basis of the applicable criteria; and Membership number
d) When needed for purposes of the engagement, access to appropriate individuals within the
acquiree(s) in a business combination. Based on your knowledge and description of the case, answer the following question
1) Whose responsibility is to list out assumptions underlying prospective financial information?
Integrated Case Scenario a) Professional Accountant issuing report on prospective financial information.
Below is given draft text of the “Report on Examination of Prospective Financial formation” of b) Auditor of Company issuing report on prospective financial information.
Top Edge Limited in relation to the company’s upcoming project prepared by a staff member
c) Management of company.
in a CA firm unfamiliar with drafting such reports. The report has been drafted in a casual
manner and may consist of omissions and errors. d) Banker of company.
Report on Examination of Prospective Financial Information Ans: (c)
To
The Board of Directors Top Edge Limited 2) Which of the following statements is most appropriate regarding “use of prospective financial
information” to be included in such report?
We have examined the projection of the upcoming project to come up at Ratnagiri of Top Edge
Limited for the period from April 2023 to March 2030 as given in the Prospective Financial a) Intended use of projection is required to be disclosed. It is further necessary to caution the users
Information from page 1 to 250 in accordance with Standard on Assurance Engagement 3400, regarding inappropriateness of projections for other purposes.
“The Examination of Prospective Financial Information issued by the Institute of Chartered b) It is discretionary to state intended use of projection in such a report.
c) Intended use of projection is required to be disclosed. It is not necessary to caution the users
The preparation and presentation of the projection is the responsibility of the Management and regarding inappropriateness of projections for other purposes.
has been approved by the Board of Directors of the company.
d) It is prerogative of management to use report in the manner it deems fit.
Our responsibility is to examine the evidence supporting the assumptions (excluding the
Ans: (a)
hypothetical assumption) and other information in the prospective financial information.

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3) What should be language of such an unmodified assurance report regard underlying

assumptions?
a) Positively worded to suggest assumptions are a reasonable basis.
b) Negatively worded to suggest assumptions are not on a reasonable basis.
c) Neither positively worded nor negatively worded about assumptions.
d) Depends upon the professional judgment of the Chartered Accountant.
Ans: (b)
4) Which of the following statements is most appropriate regarding the examination of

prospective financial information by a Chartered accountant in accordance with SAE 400?
a) Accuracy of projections is vouched for based upon performing procedures thoroughly.
b) Projections can go haywire; It depends upon the professional judgment of the Chartered Accountant
to vouch for the accuracy of projections.
c) Accuracy of projections is not at all vouched for in an assurance report on prospective financial
information.
d) The matter of accuracy of projections or otherwise is not domain of such an examination.
Therefore, there is no reporting requirement under SAE 3400.
Ans: (c)
5) Which of the following statements is most appropriate regarding UDIN in context examination
of prospective financial information by a Chartered Accountant?
a) It is mandatory to state UDIN in such type of reports.
b) It is desirable to state UDIN in such type of reports.
c) It is not required to state UDIN in such type of reports as it is not an audit engagement.
d) It is not required to state UDIN in such type of reports as it is not an engagement related to historical
financial information.
Ans: (a)

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PROSPECTIVE FINANCIAL INFORMATION AND OTHER ASSURANCE SERVICES
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12
CHAPTER
DIGITAL AUDITING
AND ASSURANCE
Special Aspects of Auditing In an

Automated Environment
Question 1
Wrote a short note on: Understanding and documenting automated environment (RTP May 20)
Answer 1
Understanding and Documenting Automated Environment: Understanding of the automated
environment of a company is required as per SA 315. The auditor’s understanding of the automated
environment should include the following:
• The applications that are being used by the company;
• Details of the IT infrastructure components for each of the application;
• The organization structure and governance;
• The policies, procedures and processes followed;
• IT risks and controls.
The auditor is required to document the understanding of a company’s automated environment as per
SA 230.
Question 2
CA Vipin has been appointed as Statutory Auditor by IG Insurance Co. Ltd. for 3 of its branches
for the F.Y.
2019-2020. Insurance Company is using a software called “Applied Epic” wherein all
transactions (policy issuance, premium receipts, expense of insurance company, incomes, assets
and liabilities) are recorded and financial statements generated at the end of the financial year.
CA Vipin not technically equipped and well versed with technology, decided to follow traditional
manual auditing approach and started the audit.
He is of the view that understanding and using the auditee’s automated environment is optional
and not required. Do you agree with the approach and views of CA Vipin? (PYP 4 Marks, Nov ‘20)
Answer 2
As per SA315, understanding of the automated environment of a company is required. The auditor’s
understanding of the automated environment should include the following:
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DIGITAL AUDITING AND ASSURANCE DIGITAL AUDITING AND ASSURANCE
i. The applications that are being used by the company; Operating Server and
Application Used for Database Network
ii. Details of the IT infrastructure components for each of the application; System Storage
Integrated
iii. The organization structure and governance; SAP ECC/ HP Server and
application Oracle 19c HP-UX LAN, WAN
HANA NAS
iv. The policies, procedures and processes followed; software
v. IT risks and controls. Front Desk,
MS-SQL Windows 2016 In-house HP Server
REVS Guest
The auditor is required to document the understanding of a company’s automated environment as per Server 2018 Server developed Internal HDD
Reservations
SA 230. Restaurant
MS-SQL Windows 2016 In-house HP Server
Thus the approach of CA Vipin is not correct considering the above mentioned requirements of SA KOTS and Kitchen
Server 2018 Server developed Internal HDD
315 and SA 230. Orders
Windows 2016 Packaged HP Server
BILLSYS Billing Oracle 12c
Server Software Internal HDD
Question 3
Beta Hotel operates in an automated environment and uses application softwares for front Multiple Choice Questions (MCQs)
desk, Guest reservations, Restaurant and kitchen orders and billing for which CA Anil has been Question 1
appointed as an auditor. Guide CA Anil the various key aspects that needs to be considered by
KJ Private Ltd. is engaged in the business of e-commerce wherein most of the operations are
him while understanding of the automated environment of the Company in accordance with
automated.
SA 315. Is he required to document the same? If yes, illustrate by giving one example. (PYP 4
Marks May ‘22) The company has SAP at its ERP package and is planning to upgrade the SAP version.
Answer 3 Currently, the version of SAP being used is fine but the higher version would lead to increased
efficiencies and hence the company is considering this plan which will also involve a huge outlay.
Understanding and Documenting Automated Environment: Understanding of the automated
environment of a company is required as per SA 315. The auditor’s understanding of the automated KPP & Associates, were appointed as the statutory auditors of this company for the year ended
environment should include the following: 31 March 2019 and the statutory audit firm has been working in this industry for long but most
of the work which the firm did was more of risk advisory or internal audit.
1. The applications that are being used by the company;
For the first time, this audit will be conducted and that’s why the audit team started obtaining
2. Details of the IT infrastructure components for each of the application;
understanding of the operations of the company which included understanding of the SAP
3. The organization structure and governance; system of the company.
4. The policies, procedures and processes followed; However, the management of the company was not comfortable with this approach of the audit
5. IT risks and controls. team particularly because audit team was spending good time on understanding of the IT
systems of the company.
The auditor is required to document the understanding of a company’s automated environment as per
SA The management suggested that the auditors should limit their understanding and should
perform audit procedures rather than getting into business/ operations.
230. The illustration below is an example of how an auditor can document details of an automated
environment: But the auditors have a different view on this matter and because of which work has got stuck.
In the given situation, please suggest what should be the course of action.
(a) The approach of audit team to obtain detailed understanding of the company before starting
with the audit procedures is absolutely fine. If the auditors don’t understand the systems
properly the audit procedures may not be appropriate.

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(b) The management’s concern regarding the approach of the auditors seems reasonable. The Question 1
auditors are spending time on understanding of the systems/ business and not performing Briefly describe the advantages and challenges of Auditing digitally.
their audit procedures.
Answer 1
(c) This being a private company and that too into the business of e-commerce, the auditors
Following are key features or advantages of Auditing Digitally:
should have knowledge about the operations of the company through their understanding of
the industry and hence should not get into this process of obtaining detailed understanding (i) Improved Quality of Audits: The impact on quality is evident, through automation, data
at the client place. analytics techniques we can easily move from sample auditing to full population of transactions
being reviewed or re-performed. This ultimately free up time for audit teams to analyses the
(d) The audit team could have planned their work differently. They should involve IT experts
information and better understand the business they audit. Technology requires an element of
who would have knowledge of the systems of the company and hence lot of time can be saved.
upfront investment, and it can be challenging to implement with regards to resources and people,
Further in case of such type of industry, involvement of IT experts is anyways required
but the value once it is up and running is undeniable.
mandatorily as per the legal requirements. (RTP Nov 19)
(ii) Decreasing human dependency: Using technology minimizes the manual intervention which
Ans: (a).
ultimately results in reducing the risk of manual errors. Technology helps in streamlining the
process of testing for auditors which decreases the errors which occur from the judgement of
different individuals.
(iii) Increases Transparency: With the technological advancement transparency has been increased.
New ERPs and tools have audit trail feature available to trace the transaction end to end. It helps
the management or auditors to review the details like the date on which any change is made, who
made the change, what has been changed, all such details are captured and can be used while
performing audit.
(iv) Automation and Ease: Automating tasks like recording work in repositories, extracting data
and sampling have improved the quality of audit and reduced the manual error. Using dashboards
(e.g., Power BI) for reporting helps in understanding the position and helps the auditor to form
his opinion.
(v) Improved Efficiency: What used to take weeks to learn and programme using deep experts, is
now easily available to auditors after some simple training and digital upskilling. The result may
be increased efficiency and fewer errors, but the benefits are wider reaching and personal. This
also results in improved retention of talent and confidence.
(vi) Better risk assessment: With usage of automation and technology in audit, auditor may focus on
the real challenges and assess the potential risk precisely. It gives time to auditors to focus on the
bigger picture rather than being involved with repetitive tasks. Dashboards, visual presentations
and other tools helps in understanding where the risk lies and what all areas need more attention.
Challenges – Reluctance to change, challenges with data security and governance, choosing the right
tool and automating the right process, ensuring standardization and correct configurations to avoid
error and bias, evaluating business benefits the organization wants to achieve with automation and the
roadmap for digital strategy.

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Question 2 5. Assessing the complexity of the IT environment: Not all applications of the IT environment
have the same level of complexity. The level of complexity for individual characteristics differs
What are the stages involved in understanding the IT environment and what key considerations
across applications.
auditor should consider?
Complexity is based on the following factors – automation used in the organization, entity’s
Answer 2 reliance on system generated reports, customization in IT applications, business model of the
Key Areas for an Auditor to Understand IT Environment are as follows: entity, any significant changes done during the year and implementation of emerging technologies.
1. Understand the flow of transaction: The auditor’s understanding of the IT environment may After considering the above factors for each application the over complexity is assessed of the IT
environment.
focus on identifying and understanding the nature and number of the specific IT applications and
other aspects of the IT environment that are relevant to the flows of transactions and processing of
information in the information system. Changes in the flow of transactions, or information within Question 3
the information system may result from program changes to IT applications, or direct changes to Auditor should scope in ITGCs to tests when there are IT dependencies identified in the system.
data in databases involved in processing or storing those transactions or information. Briefly describe the types of IT dependencies.
2. Identification of Significant Systems: The auditor may identify the IT applications and supporting Answer 3
IT infrastructure concurrently with the auditor’s understanding of how information relating to There are five types of IT dependencies as described below:
significant classes of transactions, account balances and disclosures flows into, through and out
Type Description
the entity’s information system.
3. Identification of Manual and Automated Controls: An entity’s system of internal control Automated controls are designed into the IT environment to enforce business rules.
contains manual elements and automated elements (i.e., manual and automated controls and other For example,
Automated
resources used in the entity’s system of internal control). An entity’s mix of manual and automated Controls Purchase order approval via workflow or format checks (e.g., only a particular date format
elements varies with the nature and complexity of the entity’s use of IT. The characteristics of is accepted), existence checks (e.g., Duplicate customer number cannot exist), and/or
manual or automated elements are relevant to the auditor’s identification and assessment of the reasonableness checks (e.g., maximum payment amount) when a transaction is entered.
risks of material misstatement. System generated reports are information generated by IT systems. These reports
4. Identification of the technologies used: The need to understand the emerging technologies are often used in an entity’s execution of a manual control, including business
implemented and the role they play in the entity’s information processing or other financial Reports performance reviews, or may be the source of entity information used by us when
reporting activities and consider whether there are risks arising from their use. selecting items for testing, performing substantive tests of details or performing a
Given the potential complexities of these technologies, there is an increased likelihood that the substantive analytical procedure. E.g. (Vendor master report, customer ageing report)
engagement team may decide to engage specialists and/or auditor’s experts to help understand Calculations are accounting procedures that are performed by an IT system instead of
whether and how their use impacts the entity’s financial reporting processes and may give rise to a person. For example, the system will apply the ‘straight-line’ depreciation formula
risks from the use of IT. to calculate depreciation of an asset (i.e., cost of the asset, less the residual value
Calculations
Some examples of emerging technologies are: of the asset at the end of its useful life divided by the useful life of the asset) or the
system will calculate the value of the amount invoiced to a customer by multiplying
• Blockchain, including cryptocurrency businesses (e.g., token issuers, custodial services, exchanges, the item price times the quantity shipped.
miners, investors)
Security including segregation of duties is enabled by the IT environment to restrict
• Robotics access to information and to determine the separation of roles and responsibilities
Security
• Artificial Intelligence that could allow an employee to perpetrate and conceal errors or fraud, or to process
• Internet of Things errors that go undetected.
• Biometrics Interfaces are programmed logic that transfer data from one IT system to another.
Interfaces For example, an interface may be programmed to transfer data from a payroll sub-
• Drone
ledger to the general ledger.
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Question 4 • Identity-Based Attacks: When a valid user’s credentials have been compromised and an adversary
What does cyber risk explain it with some examples? is pretend to be that user. For e.g., people often use the same user ID and password across multiple
accounts. Therefore, possessing the credentials for one account may be able to grant access to
Answer 4
other, unrelated account.
A cyber-attack is an attempt to gain unauthorized access to a computing system or network with the
• Insider Threats: When current or former employees that pose danger to an organization because
intent to cause damage, steal, expose, alter, disable, or destroy data.
they have direct access to the company network, sensitive data, and intellectual property (IP), as
Regulators across the globe have placed the topic of cyber risk management under increasing scrutiny, well as knowledge of business processes, company policies or other information that would help
requiring financial institutions to assess the maturity of their cybersecurity program, manage cyber carry out such an attack.
risks, and enhance resiliency against cyber-attacks. Most common types of cyber- attacks are:
• DNS Tunneling: DNS Tunneling is a type of cyberattack that leverages domain name system
• Malware: Malware or malicious software is any program or code that is created with the intent to do (DNS) queries and responses to bypass traditional security measures and transmit data and code
harm to a computer, network or server. Malware is the most common type of cyberattack, its subsets within the network. This tunnel gives the hacker a route to unleash malware and/or to extract data,
are ransomware, fileless Malware trojans, viruses etc. IP or other sensitive information by encoding it bit by bit in a series of DNS responses.
• IoT-Based Attacks: An IoT attack is any cyberattack that targets an Internet of Things (IoT)
Type Description
device or network.
In a ransomware attack, an adversary encrypts a victim’s data and offers to provide
Once compromised, the hacker can assume control of the device, steal data, or join a group of
a decryption key in exchange for a payment. Ransomware attacks are usually
Ransomware infected devices
launched through malicious links delivered via phishing emails, but unpatched
vulnerabilities and policy misconfigurations are used as well.
Fileless malware is a type of malicious activity that uses native, legitimate tools Question 5
Fileless built into a system to execute a cyber-attack. Unlike traditional malware, fileless Briefly describe the cyber security Framework.
Malware malware does not require an attacker to install any code on a target’s system,
making it hard to detect. Answer 5
A trojan is malware that appears to be legitimate software disguised as native Cybersecurity framework includes how management is identifying the risk, protecting and safeguarding
Trojan operating system programs or harmless files like free downloads. Trojans are its assets (including electronic assets) from the risk. Management preparedness to detect the attacks,
installed through social engineering techniques such as phishing or bait websites. anomalies and responsiveness to the adverse event.
Mobile malware is any type of malware designed to target mobile devices. Mobile Identify the risk:
Mobile
malware is delivered through malicious downloads, operating system vulnerabilities, Auditor has to determine whether the entity’s risk assessment process considers cybersecurity risks.
Malware
phishing, smishing, and the use of unsecured Wi-Fi. Entity should conduct a periodic risk assessment & develop a management strategy which identifies
Domain appears to be legitimate at first glance, but a closer look will reveal subtle cybersecurity risks around IT system failure affecting the entity’s primary business or potential loss of
differences. data or inability to access data as required, Risk of unauthorized access to the IT network.
Email spoofing is a type of cyberattack that targets the businesses by using emails The entity should maintain and periodically reviews an inventory of their information assets- i.e.,
Email with forged sender addresses. Because the recipient trusts the alleged sender, they Asset Management (e.g., intellectual property, patents, copyrighted material, trade secrets and other
Spoofing are more likely to open the email and interact with its contents, such as a malicious intangibles).
link or attachment. The entity should classify and prioritize protection of their information assets based on sensitivity and business
value and periodically reviews the systems connected to the network on which digital assets reside.
From the governance perspective management should review how cybersecurity risks affect internal
controls over financial reporting. In case of adverse attack how management is going to assess the
impact on the recoverability of financial data and impact on revenue recognition.

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Management needs to identify if any established a risk-based cybersecurity program can be leveraged Once the impact evaluated and communicated with the regulators the recovery plan needs to be
e.g. (NIST, ISO etc.) implemented to overcome the impact. Necessary improvements – like patch upgrades, better controls,
To determine overall responsibility for cybersecurity in the business environment entity should improved technology in terms of firewall, anti-virus, tools etc needs to be implemented to safeguard
establish roles and responsibilities over cybersecurity (CISO, CIO). Further the risk assessment should the entity.
be discussed with those charged with governance (e.g., the Audit Committee or Board of Directors).
Protect the risk Question 6
Obtained an understanding of the entity’s processes for safeguarding of assets subject to cybersecurity. What are the advantages and disadvantages of remote audit?
Entity monitors whether there has been unauthorized access to electronic assets and any related impact
Answer 6
on financial reporting.
Formal training should be conducted to make the teams aware of the risk associated with cyber- ADVANTAGES DISADVANTAGES
attacks. Entity should implement effective controls for data security. Entity should have a process
& procedures in place for identifying material digital/electronic assets on the balance sheet subject Cost and time effective: No travel time and travel Due to network issues, interviews and meetings
to cybersecurity risk (e.g., intellectual property, patents, copyrighted material, trade secrets) and costs involved. can be interrupted.
prioritizing their protection based on criticality. Limited or no ability to visualize facility culture
Detect The risk of the organization, and the body language of the
Comfort and flexibility to the audit team as they auditees.
Entity should have controls and procedures that enable it to identify cybersecurity risks and incidents would be working from home environment,
and to assess and analyse their impact on the entity’s business, evaluate the significance associated Time zone issues could also affect the efficiency
with such risks and incidents, and consider timely disclosures. of remote audit session
Review entity’s processes to monitor and detect security breaches or incidents. If management The opportunity to present doctored documents
has implemented anti-virus in the system to secure it from anomalies or if firewall logs are being Time required to gather evidence can spread over
and to omit relevant information is increased.
continuously monitored to detect any repetitive attacks. A monitoring process should be established several weeks, instead of concentrated into a
This may call for additional planning, some
to review how many such events have been denied by the firewall. Monitoring process should also small period that takes personnel from their daily
additional/different audit procedures, Security
include if any upgrades or updates are required to safeguard the systems from vulnerabilities. activities.
and confidentiality violation.
Respond to the risk Remote access to sensitive IT systems may not
Auditor can get first-hand evidence directly from
In case of material cybersecurity or data breach has been identified management should capture the be allowed. Security aspects related to remote
the IT system as direct access may be provided.
details of nature of incident and how the incident or data breach was identified. Entity should have access and privacy needs to be assessed
a response planning in place to capture the details of nature of incident and the same needs to be
Cultural challenges for the auditor. Lack of
communicated with those who are ultimately responsible for this framework and with those charge
knowledge for local laws and regulations could
with governance. Widens the selection of auditors from global
impact audit. Audit procedures like physical
network of experts.
The security incident response plan helps in analysing the impact and severity of the attack and verification of assets and stock taking cannot be
helps the organisation in taking the appropriate actions. Management should assess Litigation costs, performed.
Regulatory investigation costs and Remediation costs as a part of mitigation process and improvement
management should assess the future action plans that needs to be taken to safeguard the organisation
from such attacks.
Recover from risk
Entity should undertake appropriate actions to recover from the attack and make sure the business is
up and running.

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In an automated environment, the data stored and processed in systems can be used to get various Enterprises are adopting emerging technologies at a rapid pace to create synergies and harness
insights into the way business operates. This data can be useful for preparation of management the latest technologies. Give 3 examples of automated tools used as a part of emerging technologies
information system (MIS) reports and electronic dashboards that give a high- level snapshot of along with the risk and audit considerations associated with these tools.
business performance. In view of above you are required to briefly discuss the meaning of data
Answer 8
analytics and example of such data analytics techniques.
Enterprises are adopting emerging technologies at a rapid pace to create synergies and harness the
Answer 7
latest technologies.
Generating and preparing meaningful information from raw system data using processes, tools, and
Robotic process automation (RPA), blockchain, machine learning, Internet of Things (IOT) and
techniques is known as Data Analytics. Audit analytics or audit data analytics involves analyzing
artificial intelligence (AI) are some prime examples of automation.
large sets of data to find actionable insights, trends, draw conclusions and for informed decision
making. The use of audit analytics enables greater efficiencies and more accurate findings from the Internet of Things
review process. IoT is the concept of connecting any device (cell phones, coffee makers, washing machines, and so
As a result, businesses will be able to create strategies based on verifiable data and professional on) to the internet. Key components of IoT are data collection, analytics, connectivity, and people
assumptions and auditors can improve the audit quality. It allows auditors to more effectively audit and process. IoT not only changes the business model, but also affects the strategic objectives of the
the large amounts of data held and processed in IT systems in larger clients. organization. The risk profile of the entity changes with exposure to new laws and regulations.
Some of the popular tools used across the industry as part of CAATs are listed below: Audit Implications
1. ACL - Audit Command Language (ACL) Analytics is a data extraction and analysis software used A shift to connected devices and systems may result in auditors not being able to rely only on manual controls.
for fraud detection and prevention, and risk management. It samples large data sets to find irregularities Instead, auditors may need to scope new systems into their audit. Audit firms may need to train and
or patterns in transactions that could indicate control weaknesses or fraud. upskill auditors to evaluate the design and operating effectiveness of automated controls.
2. Alteryx - Alteryx is used to consolidate financial or operational data to assess controls. A fully Consumer-facing tools that connect to business environments in new ways can impact the flow of
transparent audit trail of every action is performed in Alteryx in form of a workflow which makes it transactions and introduce new risks for management and auditors to consider. Consider payment
easier for the user to learn as no prior knowledge of coding or scripting is required. Alteryx can also processing tools that allow users to pay via credit card at a retail location through a mobile device
be leveraged to automate analytics and perform Machine Learning to search for patterns indicative of This could create a new path for incoming payments that may rely, in part, on a new service provider
fraud or irregularities speed up your processes like accounting close, tax filings, regulatory reporting, supplying and routing information correctly. Auditors would need to consider the volume of those
forecast creation etc. It can also be used to automate set procedures that are performed periodically transactions and the processes and controls related to it.
like reconciliations, consolidations, marketing workflows, system integrations, continuous audits etc.
Common risks of IoT:
3. Power BI – Power Bi is a business intelligence (BI) platform that provides nontechnical business
The key risks associated with IoT, including, device hijacking, data siphoning, denial of service
users with tools for aggregating, analyzing, visualizing and sharing data. From audit perspective, such
attacks, data breaches and device theft.
visualization tools can be used to find the outliers in the population, it can also be used for reporting
purpose (audit reports) in an interactive dashboard to the higher management. AI (Artificial intelligence)
4. CaseWare – CaseWare is a data analysis software & provide tools that helps in conducting audit Artificial intelligence (AI) refers to a system or a machine that can think and learn. AI systems utilize
and assurance engagements quickly, accurately and consistently. It shares analytical insights which data analysis and algorithms to make decisions based on predictive methods. Complex algorithms are
help in taking better informed decisions. It helps in streamlining processes and eliminating the routine developed to propose decisions based on a pattern or behavior learned over time.
tasks. Used by accounting firms, governments and corporations worldwide, this trusted platform Siri to help find your Air Pods or told Amazon Alexa to turn off the lights, quick commands to open
integrates everything you need to conduct assurance and reporting engagements. a phone camera or start a particular playlist, AI to predict when to book the lowest prices for flights,
hotels, car and vacation home rentals. Using historical flight and hotel data, AI will also recommend
to the user whether the booking has reached its lowest price point or if the user should hold out a bit
longer for the price to drop.

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Auditor Implications Common risks for blockchain technology

Given the invisible nature of algorithms, audits must focus on the logical flow of processes. A review of The strengths of blockchain can also be its weaknesses. The inability to reverse transactions and
AI should ascertain whether unintended bias has been added to the algorithms. Auditors should assess to access data without the required keys make the system secure, but also mean that organisations
the effectiveness of algorithms and whether their output is appropriately reviewed and approved. need specific protocols and management processes to ensure that they are not locked out and have
Because AI is built on software modules, auditors must also consider cybersecurity and search for clear contingency plans. Operating through network nodes could also expose the organisation
possible bugs and vulnerabilities that can be exploited to impact AI functionality. Auditors should to cyber-attacks and data hacks, so security issues are important. Auditors should also ensure that
confirm their understanding of how the use of AI affects the entity’s flows of transactions, including the organisation has the necessary data management processes and complies with regulations. The
the generation of reports or analytics used by management. Auditors also should consider whether regulatory landscape is still evolving for blockchain, so audit teams should check that compliance
the AI is making decisions—or being utilized by management as part of the decision-making process. managers are following developments constantly and adapting processes accordingly.
If management shifts its focus on oversight by relying on AI, auditors should understand what shift
occurred, how new risks might be addressed, and whether existing risks may not be getting the same
Question 9
level of attention.
Emerging technologies can bring great benefits, but they also come with a varied set of substantial
Understanding these changes could drive changes in the audit approach.
risks.
Common risks for AI
Give some examples of technology risks of digital system and the control considerations to
AI comes with list of risks. Security is one of the key risks – the more data the system uses, from consider while assessing technology risk.
more sources, the more entry points and connections are formed and the greater the potential risks.
Answer 9
Inappropriate configuration - AI may also be used to diagnose medical conditions. If it is badly
configured or malfunctions, it could harm people before the problem is spotted. Data privacy - The The strength of the auditing profession is the assessment of risks and controls. As they address
data used and shared should have the necessary explicit consent from data providers. the challenge of assessing technology risk, auditors can and should focus on the following control
considerations:
Blockchain
1. Auditors should gain a holistic understanding of changes in the industry and the information
Blockchain is based on a decentralized and distributed ledger that is secured through encryption.
technology environment to effectively evaluate management’s process for initiating, processing,
Each transaction is validated by the blockchain participants, creating a block of information that is
and recording transactions and then design appropriate auditing procedures.
replicated and distributed to all participants. All blocks are sequenced so that any modification or
deletion of a block disqualifies the information. 2. Auditors, as appropriate, should consider risks resulting from the implementation of new
technologies and how those risks may differ from those that arise from more traditional, legacy
Despite resistance, the benefits associated with blockchain technology are being recognized across a
systems.
variety of other industries.
3. Auditors should consider whether digital upskilling or specialists are necessary to determine the
Audit Implications
impact of new technologies and to assist in the risk assessment and understanding of the design,
Auditors should consider the appropriate governance and security transactions around the transactions. implementation, and operating effectiveness of controls. E.g., cybersecurity control experts, IT
Although blockchain’s core security premise rests on cryptography, there are risk factors associated specialists in the team etc.
with it. As blockchain interacts with legacy systems and business partners, concerns related to insecure
• Reliance on systems or programs that are inaccurately processing data, processing inaccurate data,
application programming interfaces (APIs), data confidentiality and privacy cannot be ignored.
or both
Weak blockchain application development protocols are something auditors cannot overlook.
• Unauthorized access to data that might result in destruction of data or improper changes to data,
Similarly, data privacy laws and regulations may be area of concern as data are communicated across
including the recording of unauthorized or non-existent transactions or inaccurate recording of
geographic boundaries.
transactions (specific risks might arise when multiple users access a common database)
Auditors must be able to determine whether the data put on blockchain will expose the enterprise to
• The possibility of information technology personnel gaining access privileges beyond those
liability for noncompliance with applicable laws and regulations.
necessary to perform their assigned duties, thereby leading to insufficient segregation of duties

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• Unauthorized or erroneous changes to data in master files 5. Virtual Banking and Transactions: A forward-thinking financial institution, establishes a presence
• Unauthorized changes to systems or programs in the metaverse to offer virtual banking services. Users can create virtual bank accounts, access
personalized financial dashboards, and perform transactions using virtual currencies. Customers
• Failure to make necessary or appropriate changes to systems or programs
can seamlessly transfer funds, make virtual purchases, and engage in virtual commerce, all within
• Inappropriate manual intervention the immersive environment of the metaverse. XYZ Bank leverages the metaverse to provide a
• Potential loss of data or inability to access data as required convenient and interactive banking experience, attracting tech-savvy customers who value digital
• Risks introduced when using third-party service providers innovation.
• Cybersecurity risks 6. Digital Asset Management: A digital asset management company, recognizes the growing
popularity of virtual assets in the metaverse. They launch a virtual asset trading platform within
the metaverse, allowing users to buy, sell, and trade NFTs and other digital assets. Investors
Question 10 can diversify their portfolios, participate in virtual auctions, and even showcase their virtual art
Give example of emerging technologies available for Next Generation Audit along with the risks collections in virtual galleries. Crypto Investments Ltd. leverages the metaverse’s decentralized
associated with it and secure infrastructure to facilitate transparent and efficient transactions of virtual assets.
Answer 10 7. Virtual Financial Education and Training: A Financial Learning Academy aims to enhance
Examples of Emerging Technologies available for Next Generation Audit: financial literacy using the metaverse. They create a virtual classroom environment where
participants can attend interactive financial education sessions. Students can engage in simulated
1. Drone Technology: Using drone technology in the remote locations for stock counts. Drones
investment activities, learn about budgeting and financial planning, and gain hands- on experience
have great payload capacity for carrying sensors and cameras, thus they can photograph and
physically examine the count of large quantities of fixed assets and inventory. through virtual trading simulations. Financial Learning Academy leverages the immersive nature
of the metaverse to provide an engaging and practical financial education platform, preparing
Drone captured audit information can be combined with various alternative sources of information
individuals for real-world financial challenges.
such as QR code readers, handheld bar scanners, manual counts etc. to optimise quality of
deliverables, consolidate audit information and enhance the execution speed while ensuring 8. Virtual Meetings and Conferences: For a leading industry even an organisation hosts a virtual
correctness and completeness of data. conference within the metaverse. Participants from around the world can access the conference
2. Augmented reality: The technology allows users to view the real-world environment with through their virtual avatars. They can attend keynote speeches, panel discussions, and networking
augmented (added) elements, generated by digital devices. events in virtual conference halls. Attendees can interact with industry experts, explore virtual
exhibition booths, and establish valuable connections in the financial sector. Global Finance
One famous example was Pokémon Go, a game for mobile devices in which players chase
Summit leverages the metaverse to create a global and inclusive conference experience, fostering
imaginary digital creatures (visible on their mobile phones) around physical locations.
collaboration and knowledge sharing.
3. Virtual reality: VR goes a step forward and replaces the real world entirely with a simulated
9. Data Visualization and Analytics: A company utilizes the metaverse to offer advanced data
environment, created through digitally generated images, sounds, and even touch and smell.
Using special equipment, such as a custom headset, the user can explore a simulated world or visualization and analytics tools to financial professionals. Their virtual analytics platform allows
simulate experiences such as flying or skydiving. users to visualize complex financial data in interactive and immersive 3D environments. Users
can explore data trends, conduct simulations, and analyze financial performance through intuitive
4. Metaverse: The metaverse is the emerging 3-D digital space that uses virtual reality, augmented
interfaces within the metaverse.
reality, and other advanced internet technology to allow people to have lifelike personal and
business experiences online. It represents a convergence of digital technology to combine and Analytics Solutions Inc. leverages the metaverse’s immersive capabilities to enhance data-driven
extend the reach and use of Cryptocurrency, Artificial Intelligence (AI), Augmented Reality (AR) decisionmaking, enabling financial professionals to gain deeper insights into market trends and
and Virtual Reality (VR) The internet offers many experiences today, but tomorrow’s Metaverse make informed investment decisions.
will feel more interconnected than ever before. We are heading towards mature landscape of
Common Risks associated:
virtual spaces with transferable identities and assets enabled by blockchains (NFTs) that are
interoperable or interchangeable. It further includes highly automated systems, immersive Beyond their potential, these technologies also come with challenges such as public safety,
interfaces, hyperconnected networks and digital reflections. cybersecurity, data privacy, data protection, lack of standards and technical challenges. Since they
often track movements and data, massive amounts of data are generated about the whereabouts of
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users. It also raises questions about taxation, jurisdiction, and customer protection. Regulators and Question 12
auditors have to think of the controls around privacy, data security, governance to make it more CA Y is planning to use CAATs extensively in audit of a company-be it for compliance tests or
regulated. substantive tests. Can you list out examples of few situations (in brief) of tests performed by him
using CAATs?
Question 11 Answer 12
Sukanya, a CA final student, is of the view that cyber risks are issues of IT and result only in (i) Identify exceptions: Identify exceptional transactions based on set criteria. For example, cash
information loss to an entity. She also feels that many cyber-attacks are not directly targeted at transactions above ` 10,000
financial systems and do not pose risk of material misstatements to financial statements of an (ii) Identify errors: Identify data, which is inconsistent or erroneous. For e.g.: account number
entity. which is not numeric.
Is her view proper? (iii) Verify calculations: Re-perform various computations in audit software to confirm the results
Answer 11 from application software confirm with the audit software. For e.g.: TDS rate applied as per
criteria.
The cyber risks are not an issue of IT alone. Rather, it is a business risk and has an effect on whole
business organization. It affects entity’s reputation and can lead to many other consequences which (iv) Existence of records: Identify fields, which have null values. For example: invoices which do
are listed below: - not have vendor name.
• Regulatory costs (v) Data completeness: Identify whether all fields have valid data. For example: null values in any
key field such as date, invoice number or value or name.
• Business interruptions causing an operational challenge for an organization.
(vi) Data consistency: Identify data, which are not consistent with the regular format. For example:
• Data loss, reputational loss and litigation.
invoices which are not in the required sequence.
• Ransomware - more common these days where entire systems are encrypted
(vii) Duplicate payments: Establish relationship between two or more tables as required. For
• Intellectual property theft which may not only take the competitive advantage, but we may also example, duplicate payment for same invoice.
result in any impairment/impediment charge because of the loss of IP.
(viii) Accounts exceeding authorized limit: Identify data beyond specified limit. For example,
• Incident response cost which could be for investigations & remediation’s transactions entered by user beyond their authorized limit or payment to vendor beyond amount
• Breach of Privacy, if personal data of a consumer is hacked it could have a significant impact on due or overdraft allowed beyond limit.
the organization.
• Fines and penalties Question 13
It may happen that many cyber-attacks are not directly targeted at financial systems. However, the A company is planning to use Robotics process automation (RPA) to streamline its hiring
access gained by the attackers may provide them the ability to: process. Earlier, the company used to hire from campuses of various management institutes
• Manipulate or modify financial records leading to high recruitment costs, inefficient hire yield and resultant lack of diversity. How RPA
• Modify key automated business rules can be used to automate the hiring process? List out tentative few such steps. What could be
likely benefits of using RPA in hiring process?
• Modify automated controls relied upon by the management.
Answer 13
Further, auditor should consider whether cyber risk (like other business risks) represents a risk of
material misstatement to the financial statement as part of the audit risk assessment activities. Focus RPA can be used to streamline hiring process in a company. The tentative steps could include: -
should be on understanding the cyber risks affecting the entity and the actions being taken to address • Place advertisements on social media/career advice sites.
these risks. • Link redirects candidate to a career site.

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• Career site pulls information of candidate. CASE STUDY

• An algorithm scans applicants for desired and suitable roles. XY Bank, headquartered in New York, offers a broad range of financial services including asset
• Selected candidates may be asked to play online games to assess their skills. management, commercial banking, investment banking, and treasury and securities services.
• A certain percentage of those applicants are called for a video interview using an interview software. The Five Indian banks in partnership with XY bank, provide a comprehensive range of banking
services and products encompassing retail banking, corporate banking, international banking,
The automated hiring process will reduce full time effort involvement, provide with a wider assessment and other financial services.
range, reduce the impact of recruiter biases, increase the efficiency of mapping of interested candidates,
reduce recruiting costs, increase hire yield, reduce time to hire, increase diversity. All these banks have been significant contributors to the digitalization of banking services in
India.
Under the pilot programme, the Indian banks will open on-chain Nostro accounts with XY
CASE STUDY Bank branch in Gift City. The blockchain-based system is expected to facilitate instant, 24×7
What has happened: settlement between the accounts held at the US bank. Essentially, it will create a private intra-
correspondent banking network, redefining the traditional banking hours and enabling seamless
The CEO of a hotel realized their business had become the victim of wire fraud when the accounts
money transfer.
payable executive began to receive insufficient fund notifications for regularly recurring bills.
Following are the illustrative steps for performing audit of above said block chain:
A review of the accounting records exposed a serious problem. Upon investigating it was noted
that the CEO had clicked on a link in an email that he thought was from the trusted source. a) Obtain a comprehensive understanding of the blockchain-based pilot program, including its
However, it wasn’t and when he clicked the link and entered his credentials, the cyber criminals objectives, scope, and key processes involved.
captured the CEO’s login information, giving them full access to intimate business and personal b) Review the partnership agreements, contracts, and legal documentation governing the
details. relationship between the Indian banks and XY Bank.
Type of Attack: Social engineering, phishing attack. c) Identify the specific blockchain technology used, its functionalities, and the underlying smart
A phishing attack is a form of social engineering by which cyber criminals attempt to trick contracts.
individuals by creating and sending fake emails that appear to be from an authentic source, such d) Assess Internal Controls:
as a business or colleague. The email might ask you to confirm personal account information
Review policies and procedures related to the on-chain Nostro accounts, settlement processes,
such as a password or prompt you to open a malicious attachment that infects your computer
and money transfer mechanisms.
with malware.
Assess the governance framework, risk management practices, and compliance procedures
Result: The hotel’s cash reserves were depleted. The fraudulent transfers amounted to more
established by the Indian banks and XY Bank.
than ₹1 million.
e) Review Security Measures:
The hotel also contacted a cybersecurity firm to help them mitigate the risk of a repeat attack.
Assess encryption methods, cryptographic key management, and secure transmission
Impact: The business lost ₹1 million, and the funds were not recovered. Further there was loss
protocols used for data protection.
of business reputation too.
Review measures taken to prevent unauthorized access, cyber threats, and potential
Lessons Learned:
vulnerabilities in the blockchain network.
- Train the staff about the dangers of clicking on unsolicited email links and attachments, and
f) Test Transaction Validity and Accuracy:
the need to stay alert for warning signs of fraudulent emails. Engage in regular email security
training. Validate that transactions are recorded and settled accurately on the blockchain, ensuring
adherence to relevant regulations and contractual obligations.
- Implement stringent wire transfer protocols and include a secondary form of validation
(Multi Factor Authentication) Perform reconciliations between on-chain Nostro accounts and the corresponding accounts
held at XY
- Have a cyber-incident response plan ready to implement.

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Bank to confirm the accuracy of balances and transactions. E. CA X is planning for audit of an entity. The timelines are agreed in a meeting with key
g) Evaluate Compliance and Regulatory Requirements: management person on an electronic meeting platform. The entity also agrees to provide data
electronically. Video-conference meetings are to be held from time to time with the client.
Review documentation and procedures related to customer due diligence, transaction
monitoring, and reporting obligations.
Ensure that the pilot program adheres to industry-specific standards and best practices. Keeping in view above situations, answer the following questions: -
h) Assess Business Continuity and Disaster Recovery: 1. In respect of situation regarding working of insurance company in health insurance sector,
which of following technologies has likely been used?
Evaluate the adequacy of backup and recovery procedures, redundancy measures, and
failover mechanisms to ensure uninterrupted operations. a) Internet of things
Test the effectiveness of these plans by conducting simulations or examining historical b) Data analytics
incidents and response procedures. c) Robotic process automation
i) Report Findings and Recommendations: d) Power BI
Provide recommendations for improving internal controls, security measures, compliance Ans: (c)
procedures, and overall efficiency and effectiveness of the pilot program.
Communicate the audit results to the relevant stakeholders, highlighting areas of concern 2. Which type of cyber-attack is referred to situation described in para [B]?
and suggesting remedial actions.
a) Ransomware
b) Trojan
Integrated Case Scenario:
c) Denial of service attacks
Consider the following five situations: -
d) File less Malware
A. Safe Health Insurance Limited is a company working in field of health insurance sector. It is
Ans: (a)
now using a claim management system where incoming claims can be immediately identified
on the website itself. A form is issued to the customer who signs it. The details are verified by
the system against data present in it. Such a system has allowed faster processing of claims, 3. In situation described at [C] above, which is not part of risk assessment procedures to assess
error-free data validation and increased customer satisfaction. cyber security risks?
B. During the course of audit of a company, it is noticed that a cyber attack took place on the a) Making inquiries regarding processes and controls relating to privileged account access
data in which files were encrypted and computers got locked. The hacker then demanded a
b) Making inquiries regarding processes and controls relating to patch management program
booty for decryption of files which was to be paid in bitcoins.
c) Making inquiries regarding processes and controls relating to vendor risk management program
C. CA X, auditor of a company, is looking into cyber security risks of the company. He is making
inquiries regarding processes and controls relating to privileged account access, patch d) Performing external network penetration testing
management program, vendor risk management program. He has also performed external Ans: (d)
network penetration testing.
D. “Verificatory” is an entity which can stamp e-mails or any files. It simplifies certifying of e-
4. The kind of services being provided by an entity described at [D] above, are example of use
mails by just e-mailing to them to an e-mail specifically created for each customer. Many law
of: -
firms can use this service to certify documents. The information is secured by networks of
thousands of computers distributed across the globe. It uses cryptographic algorithms. The a) Blockchain technology
information can be verified from anywhere in the world. Its hashing and time stamping is of b) Internet of things
significant evidentiary value.
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c) Ethical hacking
d) Cyber attestation
Ans: (a)
5. Which of following is false in an audit described at para [E]?

a) The opportunity to present doctored documents and to omit relevant information is decreased.
b) Remote access to sensitive IT systems may not be allowed.
c) It provides comfort and flexibility to the audit team as they would be working from their office/
home environment.
d) Time zone issues could also affect the efficiency of audits.
Ans: (a)

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DIGITAL AUDITING AND ASSURANCE
CA Harshad Jaju
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13
CHAPTER
GROUP
AUDITS
Question 1
Atishaya Ltd. holds the ownership of 10% of voting power and control over the composition
of Board of Directors of Neenu Ltd. While planning the statutory audit of Atishaya Ltd., what
factors would be considered by you as the statutory auditors of Atishaya Ltd for the audit of its
consolidated financial statements prepared under Ind AS? (MTP 5 Marks, April 21, Old & New
SM)
Answer 1
10% Voting Power and Control over the composition of Board of Directors: In this case, Atishaya
Ltd. holds only 10 percent of the voting power but has control over the composition of the Board of
Directors of Neenu Ltd.
In such a case, Atishaya Ltd shall be considered as a parent of Neenu Ltd and, therefore, it would
consolidate Neenu Ltd in its consolidated financial statements as a subsidiary.
The auditor should verify Atishaya Ltd’s management’s assessment of having control in Neenu Ltd
despite having only 10% voting power as per the requirements of Ind AS 110. Auditor would need to
verify as to how Atishaya Ltd controls the composition of the Board of Directors or corresponding
governing body of Neenu Ltd.
There can be various means by which such kind of control can be established. In this regard, the
auditor may verify the minutes of Board meetings, shareholder agreement entered into by the parent,
agreements with Neenu Ltd to which the parent might have provided any technology or know how,
enforcement of statute, etc.
Further, the auditor should verify that the adjustments warranted by Ind AS 110 have been made
wherever required and have been properly authorised by the management of the parent. The
preparation of consolidated financial statements gives rise to permanent consolidation adjustments
and current period consolidation adjustments. The auditor should make plan, among other things,
for the understanding of accounting policies of the Atishaya Ltd and Neenu Ltd and determining and
programming the nature, timing, and extent of the audit procedures to be performed etc.
Further, the duties of an auditor with regard to reporting of transactions with any other related parties
are given in SA 550 on Related Parties. As per SA 550 on, “Related Parties”, the auditor should review
information provided by the management of the entity identifying the names of all known related
parties. A person or other entity that has control or significant influence, directly or indirectly through
one or more intermediaries, over the reporting entity are considered as Related Party.
CA Harshad Jaju
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GROUP AUDITS GROUP AUDITS
In forming an opinion on the financial statements, the auditor shall evaluate whether the identified However, as per section 129(3) of the Companies Act, 2013 where a company having subsidiary,
related party relationships and transactions have been appropriately accounted for and disclosed in which is not required to prepare consolidated financial statements under the applicable Accounting
accordance with Ind AS 110 and Schedule III and whether the effects of the related party relationships Standards, it shall be sufficient if the company complies with the provisions on consolidated financial
and transactions prevent the financial statements from achieving true and fair presentation (for statements provided in Schedule III to the Act.
fair presentation frameworks) or cause the financial statements to be misleading (for compliance Conclusion: In the given case, Parent Ltd. has acquired 51% shares of Child Ltd. during the year
frameworks). ending 31.03.2016 and sold 20% shares during the year 2016-17. Parent Ltd. did not consolidate the
financial statements of Child Ltd. for the year ending 31.03.2016 and 31.03.2017.
Question 2 The intention of Parent Ltd. is quite clear that the control in Child Ltd. is temporary as the former
company disposed off the acquired shares in the next year of its purchase. Therefore, Parent Ltd. is
Moon Ltd. acquired 51% shares of Star Ltd. during the year ending 31-3-2017. During the
not required to prepare consolidated financial statement as per AS 21 however, for the compliance of
financial year 2017-18 the 20% shares of Star Ltd. were sold by Moon Ltd. Moon Ltd. while
provisions related to consolidation of financial statements given under section 129(3) of the Companies
preparing the financial statements for the year ending 31-3-2017 and 31-3-2018 did not consider
Act, 2013, Parent Ltd. is required to made disclosures in the financial statements as per the provisions
the financial statements of Star Ltd. for consolidation. As a statutory auditor how would you
provided in Schedule III to the Companies Act’ 2013.
deal with it? (MTP 5 Marks, Oct 18, MTP 5 Marks, March 18, RTP Nov ’18)
However, if the Parent Ltd. is required to prepare its financial statements under Ind AS, it shall have to
OR
prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary
R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock- control’, or “for operation under severe long-term funds transfer restrictions” is not available under Ind
in-trade” in its accounts. The shares are held exclusively with a view to their subsequent disposal AS 110. Paragraph 20 of Ind AS 110 states that “Consolidation of an investee shall begin from the date
in the near future. the investor obtains control of the investee and cease when the investor loses control of the investee”.
R Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can be
excluded from the consolidation. As a Statutory Auditor, how would you deal? (Old & New SM)
Question 3
Answer 2
CA. V is the auditor of Superb Ltd., a parent company which presents Consolidated Financial
Accounting Standard 21 “Consolidated Financial Statements”, states that a subsidiary should be
Statements.
excluded from consolidation when control is intended to be temporary because the shares are acquired
and held exclusively with a view to its subsequent disposal in the near future. The management of Superb Ltd. has provided the list of the components included in the
Consolidated Financial Statements. As an auditor of Consolidated Financial Statements, CA V
Where an enterprise owns majority of voting power by virtue of ownership of the shares of another
has to verify that all the components have been included in the Consolidated Financial Statements
enterprise and all the shares are acquired & held exclusively with a view to their subsequent disposal
and review the information provided by the management in identifying the components. State
in the near future, the control by the first mentioned enterprise would be considered temporary and
the procedures to be followed by CA.
the investments in such subsidiaries should be accounted for in accordance with AS 13 “Accounting
for Investments”. V in respect of completeness of this information. (MTP 5 Marks Oct 21, RTP May 23, PYP 5
Marks Nov’20)
In the case of an entity which is excluded from consolidation on the ground that the relationship of
parent with the other entity as subsidiary is temporary, the auditor should verify that the intention Answer 3
of the parent, to dispose the subsidiary, in the near future, existed at the time of acquisition of the A parent which presents consolidated financial statements is required to consolidate all its components
subsidiary. The auditor should also verify that the reasons for exclusion are given in the consolidated in the consolidated financial statements other than those for which exceptions have been provided in
financial statements. the relevant accounting standards under the applicable financial reporting framework.
As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe The auditor should obtain a listing of all the components included in the consolidated financial
longterm funds transfer restrictions” and consolidation is mandatory for Ind AS compliant financial statements and review the information provided by the management of the parent identifying the
statement in this case. components. The auditor should verify that all the components have been included in the consolidated
financial statements unless these components meet criterion for exclusion.

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In the given case, Superb Ltd has provided the list of components included in the consolidated financial (ii) What shall be the audit consideration in relation to reporting in case of unaudited components
statements (CFSs). CA V shall verify that all the components have been included in the CFSs. of Moksh Ltd. by Sambhav & Co. and how Sambhav & Co. as a principal auditor shall
Further, in respect of completeness of this information, CA V should perform the following report in case of Component ‘F’ & Component ‘G’, respectively? (MTP 5 Marks April 22,
procedures: MTP 5 Marks Mar’21)
i. review his working papers for the prior years for the known components; Answer 4
ii. review the parent’s procedures for identification of various components; As per Regulation 16(c) of the SEBI (LODR) Regulations, 2015, “material subsidiary” shall mean a
subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net worth
iii. make inquiries of the management to identify any new components or any component which respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
goes out of consolidated financial statements; [Explanation- The listed entity shall formulate a policy for determining ‘material’ subsidiary.]
iv. review the investments of parent as well as its components to determine the shareholding in Regulation 24(1) of the SEBI (LODR) Regulations, 2015, provides that at least one independent
other entities; director on the board of directors of the listed entity shall be a director on the board of directors of an
v. review the joint ventures and joint arrangements as applicable; unlisted material subsidiary, whether incorporated in India or not.
vi. review the other arrangements entered into by the parent that have not been included in the [Explanation- For the purposes of Regulation 24(1), notwithstanding anything to the contrary contained
consolidated financial statements of the group; in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose income or net worth
vii. review the statutory records maintained by the parent, for example registers under section 186, exceeds twenty percent of the consolidated income or net worth respectively, of the listed entity and
190 of the Companies Act, 2013; its subsidiaries in the immediately preceding accounting year]
viii. Identify the changes in the shareholding that might have taken place during the reporting period. On the basis of above provisions, following information is tabulated as below:
Particulars Share in Consolidated Income Share in Consolidated Net Worth

Question 4 Component ‘A’ 11.67% 5%
Sambhav & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed Component ‘B’ 3.33% 2.5%
company, Moksh Ltd. Component ‘C’ 23.33% 17.5%
Figures of income and net-worth of five out of seven components of Moksh Ltd., which are its Component ‘D’ 21.67% 22.5%
unlisted subsidiaries, is tabulated below for the immediate preceding financial year along with Component ‘E’ 6.67% 6.25%
the consolidated amount:
It can be observed that Component ‘A’, Component ‘C’ and Component ‘D’, respectively, can be
Component Component Component Component Component
Particulars Consolidated termed as “material subsidiary” as their shares in either consolidated Income or net worth exceeds
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
10%.
Income 600 70 20 140 130 40
Further, at least one independent director from the board of directors of Moksh Ltd. shall be appointed
Net Worth 1,600 80 40 280 360 100
or would have been appointed on the board of Component ‘C’ and Component ‘D’, respectively, as
The remaining two components i.e., Component ‘F’ & Component ‘G’ of Moksh Ltd. were their shares in either consolidated income or net worth exceeds 20 %.
unaudited. According to Mr. Sambhav, the engagement partner, Component ‘F’ is material to
(ii) Generally, the financial statements of all components included in consolidated financial statements
the consolidated financial statements whereas Component ‘G’ is not material to consolidated
should be audited or subjected to audit procedures in the context of a multi - location group audit.
financial statements and this fact has also been discussed in writing with those charged with
Such audits and audit procedures can be performed by the auditor reporting on the consolidated
governance of Moksh Ltd.
financial statements or by the components’ auditor.
(i) Which of the components of Moksh Ltd. can be termed as “material subsidiary” and in the
Where the financial statements of one or more components continue to remain unaudited, the
Board of which of the unlisted subsidiaries at least one independent director of Moksh Ltd.
auditor reporting on the consolidated financial statements should consider unaudited components
needs to be appointed or would be appointed? (MTP 4 Marks April 22, MTP 4 Marks Mar’21)
in evaluating a possible modification to his report on the consolidated financial statements. The
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evaluation is necessary because the auditor (or other auditors, as the case may be) has not been able to However, while considering the observations (for instance modification and /or emphasis of matter
obtain sufficient appropriate audit evidence in relation to such consolidated amounts/balances. In such in accordance with SA 705/706) of the component auditor in his report on the standalone financial
cases, the auditor should evaluate both qualitative and quantitative factors on the possible effect of statements, the principles of SA 600 needs to be considered., The parent auditor should comply
such amounts remaining unaudited when reporting on the consolidated financial statements using the with the requirements of SA 600, “Using the Work of Another Auditor”. Therefore, the concept of
guidance provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”. materiality would be considered while considering the observations of the component auditor. Hence
In the given situation, two out of seven components of Moksh Ltd. have remained unaudited where RS & Co. cannot ignore the qualification of B Ltd. while framing the opinion on consolidated financial
Component ‘F’ is material and Component ‘G’ is not material to the consolidated financial statements. statements of T Ltd.
Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the auditor’s
opinion on the consolidated financial statements of the group, in terms of the principles laid down
Question 6
in SA 705, Modifications to the Opinion in the Independent Auditor’s Report. Whereas in case of
Component ‘G’, the principal auditor should make appropriate reporting under the “Other Matters” CA Tushar is engagement partner conducting audit of consolidated financial statements of a
paragraph, pursuant to SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs, in the group which includes parent entity and its 3 subsidiaries. The standalone financial statements
Independent Auditor’s Report. of its subsidiaries are audited by component auditors. He is considering accepting such
appointment. What specific considerations have to be kept in mind by him before accepting
appointment as principal auditor of the group?
Question 5 After acceptance, he is in quandary with regard to determination of materiality during audit of
T Ltd. is holding 68% share of B Ltd, 51% share of C Ltd. RS & Co. Chartered Accountants are consolidated financial statements. What specific considerations have to be kept in mind while
the statutory auditors of T Ltd. MN & Co. Chartered Accountants are the statutory auditors of determining materiality during audit of above group? (MTP 5 Marks Oct ‘23)
B Ltd. and C Ltd. MN & Co have qualified the report of B Ltd. due to material discrepancies in Answer 6
standalone financial statement.
SA 600 requires auditor should consider whether the auditor’s own participation is sufficient to
While framing the opinion on Consolidated Financial Statement of T Ltd., RS & Co. (Principal be able to act as the principal auditor. For this purpose, the auditor would consider: -
Auditor) have ignored the qualification of B Ltd. considering it not material at Group Level.
(i) the materiality of the portion of the financial information which the principal auditor audits
Comment. (MTP 5 Marks Oct ‘22)
(ii) the principal auditor’s degree of knowledge regarding the business of the components
Answer 5
(iii) the risk of material misstatements in the financial information of the components audited by the
In carrying out the audit of the standalone financial statements, the computation of materiality for the
other auditor and
purpose of issuing an opinion on the standalone financial statements of each component would be
done component-wise on a standalone basis. However, with regard to determination of materiality (iv) the performance of additional procedures as set out in SA 600 regarding the components audited
during the audit of consolidated financial statements (CFS), the auditor should consider the following: by other auditor resulting in the principal auditor having significant participation in such audit.
• The auditor is required to compute the materiality for the group as a whole. This materiality should With regard to determination of materiality during the audit of consolidated financial statements
be used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation (CFS), the auditor should consider the following: -
adjustments and current period consolidation adjustments) • The auditor is required to compute the materiality for the group as a whole. This materiality
• The parent auditor can also use the materiality computed on the group level to determine whether should be used to assess the appropriateness of the consolidation adjustments (i.e., permanent
the component’s financial statements are material to the group to determine whether they should consolidation adjustments and current period consolidation adjustments) that are made by the
scope in additional components, and consider using the work of other auditors as applicable. management in the preparation of CFS.
• The principal auditor also computes materiality for each component and communicates to the • The parent auditor can also use materiality computed on the group level to determine whether
component auditor, if he believes is required for true and fair view on CFS. the component’s financial statements are material to the group to determine whether they should
scope in additional components and consider using the work of other auditors as applicable.
• The principal auditor also obtains certain confirmations from component auditor like independence,
code of ethics, certain information required for consolidation and disclosure requirements etc.

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• While considering the observations (for instance, modification and /or emphasis of matter/other OR
matter in accordance with SA 705/706) of the component auditor in his report on the standalone You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier
financial statements, the parent auditor should comply with the requirements of SA 600 “Using to the UK building and construction market. With a turnover of Rs. 2.9 billion, the company
the Work of Another Auditor”. operates through 11 business units and has nearly 1,80 branches across the countries. As an
auditor, how will you draft the report in case (a) When the Parent’s Auditor is also the Auditor of
all its Components? and (b) When the Parent’s Auditor is not the Auditor of all its Components?
Question 7
(MTP 5 Marks, April 18)
You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier
Answer 7
to the UK building and construction market. With a turnover of Rs.2.9 billion, the company
operates through 11 business units and has nearly 1,80 branches across the countries . a) When the Parent’s Auditor is also the Auditor of all its Components
As an auditor, how will you draft the report in case: While drafting the audit report, the auditor should report:
(a) When the Parent’s Auditor is also the Auditor of all its Components? • Whether principles and procedures for preparation and presentation of consolidated financial
statements as laid down in the relevant accounting standards have been followed.
(b) When the Parent’s Auditor is not the Auditor of all its Components?
• In case of any departure or deviation, the auditor should consider the requirements given in SA
(c) When the Component(s) Auditor Reports on Financial Statements under an Accounting
705, Modifications to the Opinion in the Independent Auditor’s reports in the audit report so that
Framework Different than that of the Parent?
users of the consolidated financial statements are aware of such deviation.
(d) When the Component(s) Auditor Reports under an Auditing Framework Different than
• Auditor should issue an audit report expressing opinion whether the consolidated financial
that of the Parent?
statements give a true and fair view of the state of affairs of the Group as on balance sheet date
(e) Where the financial statements of one or more components is not audited? (RTP May 18, and as to whether consolidated profit and loss statement gives true and fair view of the results of
Old & New SM) consolidated profit or losses of the Group for the period under audit.
OR • Where the consolidated financial statements also include a cash flow statement, the auditor should
You are appointed as an auditor of Najib Limited, a listed company which is a main supplier also give his opinion on the true and fair view of the cash flows presented by the consolidated cash
to the USA building and construction market. With a turnover of Rs. 1.9 billion, the company flow statements.
operates through 11 business units and has nearly 1,70 branches across the countries. b) When the Parent’s Auditor is not the Auditor of all its Components
As an auditor, how will you draft the report in case: In a case where the parent’s auditor is not the auditor of all the components included in the consolidated
(I) When the Component(s) Auditor Reports on Financial Statements under an Accounting financial statements, the auditor of the consolidated financial statements should also consider the
Framework Different than that of the Parent? requirement of SA 600.
(II) (II) When the Component(s) Auditor Reports under an Auditing Framework Different than As prescribed in SA 706, if the auditor considers it necessary to make reference to the audit of the
that of the Parent? (MTP 5 Marks, Aug’ 18 , Nov 21 & Sep’23) other auditors, the auditor’s report on the consolidated financial statements should disclose clearly the
magnitude of the portion of the financial statements audited by the other auditor(s).
OR
This may be done by stating aggregate rupee amounts or percentages of total assets, revenues and
You are appointed as an auditor of Azad Limited, a listed company which is a main supplier
cash flows of components included in the consolidated financial statements not audited by the parent’s
to the USA building and construction market. With a turnover of Rs.1.6 billion, the company
auditor.
operates through 9 business units and has nearly 135 branches across the countries. As an
auditor, how will you draft the report in case (i) When the Parent’s Auditor is also the Auditor of Total assets, revenues and cash flows not audited by the parent’s auditor should be presented before
all its Components? and (ii) When the Parent’s Auditor is not the Auditor of all its Components? giving effect to permanent and current period consolidation adjustments.
(MTP 5 Marks, May 20) Reference in the report of the auditor on the consolidated financial statements to the fact that part of
the audit of the group was made by other auditor(s) is not to be construed as a qualification of the

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opinion but rather as an indication of the divided responsibility between the auditors of the parent and In order to maintain consistency of the auditing framework and to enable the parent auditor to rely and
its subsidiaries. refer to the other auditor’s audit report in their audit report on the consolidated financial statements,
c) When the Component(s) Auditor Reports on Financial Statements under an Accounting the components’ financial statements should also be audited under a framework that corresponds to
Framework Different than that of the Parent Indian GAAS.
The parent may have components located in multiple geographies outside India applying an accounting e) Components Not Audited
framework (GAAP) that is different than that of the parent in preparing its financial statements. Foreign Generally, the financial statements of all components included in consolidated financial statements
components prepare financial statements under different financial reporting frameworks, which may should be audited or subjected to audit procedures in the context of a multi-location group audit. Such
be a well-known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of the audits and audit procedures can be performed by the auditor reporting on the consolidated financial
component. statements or by the components’ auditor.
Local component auditors may be unable to report on financial statements prepared using the parent’s Where the financial statements of one or more components continue to remain unaudited, the
GAAP because of their unfamiliarity with such GAAP. auditor reporting on the consolidated financial statements should consider unaudited components
When a component’s financial statements are prepared under an accounting framework that is different in evaluating a possible modification to his report on the consolidated financial statements. The
than that of the framework used by the parent in preparing group’s consolidated financial statements, evaluation is necessary because the auditor (or other auditors, as the case may be) has not been able to
the parent’s management perform a conversion of the components’ audited financial statements from obtain sufficient appropriate audit evidence in relation to such consolidated amounts/balances. In such
the framework used by the component to the framework under which the consolidated financial cases, the auditor should evaluate both qualitative and quantitative factors on the possible effect of
statements are prepared. The conversion adjustments are audited by the principal auditor to ensure such amounts remaining unaudited when reporting on the consolidated financial statements using the
that the financial information of the component(s) is suitable and appropriate for the purposes of guidance provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”.
consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s accounting Question 8
policies, as outlined in the group accounting manual, to facilitate the preparation of the group’s
Write a short note on: Auditor’s objectives in an audit of consolidated financial statements.
consolidated financial statements. The group accounting manual would normally contain all accounting
(RTP Nov 19)
policies, including relevant disclosure requirements, which are consistent with the requirements of the
financial reporting framework under which the group’s consolidated financial statements are prepared. Answer 8
The local component auditor can then audit and issue an audit report on the components financial The auditor’s objectives in an audit of consolidated financial statements are:
statements prepared in accordance with “group accounting policies”. (i) to satisfy himself that the consolidated financial statements have been prepared in accordance
When applying the approach of using group accounting policies as the financial accounting framework with the requirements of applicable financial reporting framework;
for components to report under, the principal/parent auditors should perform procedures necessary to (ii) to enable himself to express an opinion on the true and fair view presented by the consolidated
determine compliance of the group accounting policies with the GAAP applicable to the parent’s financial statements;
financial statements. This ensures that the information prepared under the requirements of the group
(iii) to enquire into the matters as specified in section 143(1) of the Companies Act, 2013; and.
accounting policies will be directly usable and relevant for the preparation of consolidated financial
to report on the matters given in the clauses (a) to (i) of section143(3) of the Companies Act,
statements by the parent entity, eliminating the need for auditing by the auditor, the differences
2013, for other matters under section 143(3)(j) read with rule 11 of the Companies (Audit and
between the basis used for the component’s financial statements and that of the consolidated financial
Auditors) Rules, 2014, to comment on the matters specified in sub-rule (a),(b) and (c)1 to the
statements. The Principal auditor can then decide whether or not to rely on the components’ audit
extent applicable;
report and make reference to it in the auditor’s report on the consolidated financial statements.
The auditor should also validate the requirement of preparation of CFS for the company as per
d) When the Component(s) Auditor Reports under an Auditing Framework Different than that
applicable financial reporting framework.
of the Parent
Normally, audits of financial statements, including consolidated financial statements, are performed
under auditing standards generally accepted in India (“Indian GAAS”).
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Question 9 Answer 10
Write a short note on the following: Responsibility of holding company for preparation of According to Section 129(3) of the Companies Act, 2013, where a company has one or more
Consolidated Financial Statements. (RTP Nov ’21, Old & New SM) subsidiaries, including associate company and joint venture, it shall, in addition to its own financial
Answer 9 statements prepare a consolidated financial statement of the company and of all the subsidiaries in the
same form and manner as that of its own.
Responsibility of holding company for preparation of Consolidated Financial Statements: The
responsibility for the preparation and presentation of consolidated financial statements, among other As per sub-section 6 of the section 129 of the Companies Act, 2013, the Central Government may, on
things, is that of the management of the parent. This includes: its own or on an application by a class or classes of companies, by notification, exempt any class or
classes of companies from complying with any of the requirements of section 129 or the Rules made
(a) identifying components, and including the financial information of the components to be included
thereunder.
in the consolidated financial statements;
An investment entity is an entity that:
(b) where appropriate, identifying reportable segments for segmental reporting;
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with
(c) identifying related parties and related party transactions for reporting;
investment management services;
(d) obtaining accurate and complete financial information from components;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital
(e) making appropriate consolidation adjustments; appreciation, investment income, or both; and
(f) harmonization of accounting policies and accounting framework; and (c) measures and evaluates the performance of substantially all of its investments on a fair value
(g) GAAP conversion, where applicable. basis. An investment entity need not present consolidated financial statements if it is required, in
accordance with paragraph 31 of Ind AS 110, to measure all of its subsidiaries at fair value through
Apart from the above, the parent ordinarily issues instructions to the management of the component
profit or loss. A parent shall determine whether it is an investment entity.
specifying the parent’s requirements relating to financial information of the components to be
included in the consolidated financial statements. The instructions ordinarily cover the accounting However, as per paragraph 33 of Ind AS 110, parent of an investment entity shall consolidate all
policies to be applied, statutory and other disclosure requirements applicable to the parent, including entities that it controls, including those controlled through an investment entity subsidiary, unless the
the identification of and reporting on reportable segments, and related parties and related party parent itself is an investment entity.
transactions, and a reporting timetable. Applying the above to the given case of Jambu & Sudharma Investments Ltd., which fulfils all the
conditions stated above, it is an investment entity. By applying Para 31 and 33 of Ind AS 110, it can
be concluded that Jambu & Sudharma Investments Ltd.is not required to consolidate as per Section
Question 10
129 (3) of the Companies Act, 2013.
Jambu & Sudharma Investments Ltd. is a company having paid up share capital of ` 1 crore,
it has a subsidiary, Investors Fund Management Ltd. Major business of Jambu & Sudharma
Investments Ltd. is to pool money from investors on a collective basis and invest this money in Question 11
various funds. This company pooled ` 12 crore from a number of clients, which represent the
H Co. Ltd., is a holding company with two subsidiaries R Co. Ltd., and S Co. Ltd. The H Co.
Company’s shareholders.
Ltd., adopts straight line method of depreciation for its assets whereas S Co. Ltd., follows written
While auditing books of accounts of Jambu & Sudharma Investments Ltd. CA Vardhman down value or diminishing value method. Though R Co. Ltd., follows straight line method of
observed that whole amount of ` 12 crore pooled has been invested in shares and debentures of depreciation, it does not give effect to component accounting of depreciation in respect of high
various companies and profit earned due to appreciation of the prices of these shares has been value assets. While consolidating the financials of the R Co. Ltd., and S Co. Ltd., with those of
distributed to various shareholders of the company. Performance of all of its investments is H Co. Ltd., determine the possible issues that you have to ensure for compliance in the light of
measured on fair value basis.
above facts. (PYP 5 Marks, May ’18)
Now, CA Vardhman raised an issue while auditing financial statements of Jambu & Sudharma
Investments Ltd. whether the consolidated financial statements are required as per Section
129(3) of the Companies Act, 2013? Analyse the above issue and give your opinion. (RTP Nov’22,
PYP 5 Marks Dec ‘21)
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Answer 11 Analyze the issues involved and give your views. (PYP 4 Marks, Nov ’18, Old & New SM, RTP
When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework Nov ’23)
is Different than that of the Parent: A component may alternatively prepare financial statements on Answer 12
the basis of the parent’s accounting policies, as outlined in the group accounting manual, to facilitate Consolidated Financial Statements: According to Section 129(3) of the Companies Act, 2013, where
the preparation of the group’s consolidated financial statements. The group accounting manual a company has one or more subsidiaries, including associate company and joint venture, it shall, in
would normally contain all accounting policies, including relevant disclosure requirements, which addition to its own financial statements prepare a consolidated financial statement of the company and
are consistent with the requirements of the financial reporting framework under which the group’s of all the subsidiaries in the same form and manner as that of its own.
consolidated financial statements are prepared. Thus, using group accounting policies as the financial
Further, as per Companies (Accounts) Rules, 2014, the consolidation of financial statements of the
accounting framework for components to report under, the principal/parent auditors should perform
company shall be made in accordance with the provisions of Schedule III to the Act and the applicable
procedures necessary to determine compliance of the group accounting policies with the GAAP
accounting standards. However, a company which is not required to prepare consolidated financial
applicable to the parent’s financial statements.
statements under the Accounting Standards, it shall be sufficient if the company complies with
It may be noted that change in the selection of the method of depreciation is an accounting estimate provisions on consolidated financial statements provided in Schedule III of the Act.
and not an accounting policy as per Ind-AS 8. Accordingly, the entity should select the method that
However, an investment entity need not present consolidated financial statements if it is required, in
most closely reflects the expected pattern of consumption of the future economic benefits embodied in
accordance with Ind AS 110‘Consolidated Financial Statements’, to measure all of its subsidiaries at
the asset. That method should be applied consistently from period to period unless there is a change in
fair value through profit or loss. A parent shall determine whether it is an investment entity.
the expected pattern of consumption of those future economic benefits in separate financial statements
as well as consolidated financial statements. (An investment entity is an entity that(a) obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services; (b) commits to its investor(s) that
Therefore, there can be different methods for calculation of depreciation for its assets, if their expected
its business purpose is to invest funds solely for returns from capital appreciation, investment income,
pattern of consumption is different. The method once selected in the standalone financial statements
or both; and (c ) measures and evaluates the performance of substantially all of its investments on a
of the subsidiary should not be changed while preparing the consolidated financial statements.
fair value basis.)
In the given case, assets of R Co. Ltd. (subsidiary company) is depreciated using straight line method,
In the given case, H Limited is an investment company preparing its financial statements in accordance
assets of S Co. Ltd. (subsidiary company) are depreciated using written down value method and assets
with Ind AS and the company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the
of parent company (H Co. Ltd.) are depreciated using straight line method, is in order. However, each
respective share capitals of the investee companies. In view of provisions discussed in Ind AS 110, the
part of an item of Property Plant and Equipment with a cost that is significant in relation to the total
Company is not required to prepare consolidated financial statements however, for the compliance of
cost of the item should be depreciated separately under Component Method of Depreciation as per
Companies (Accounts) Rules, 2014, it shall be sufficient if the company complies with provisions on
AS 10 on Property, Plant and Equipment. Thus, R Co. Ltd., though adopting straight line method but
consolidated financial statements provided in Schedule III of the Act.
does not giving effect to component accounting of depreciation in respect of high value assets , is not
in compliance with Ind AS 16/Accounting Standard 10 Property Plan and Equipment. Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as prescribed by law
and if they give some exemption it should be followed. If out of exemption some subsidiaries are not
consolidated, then list should be disclosed in notes to accounts with reason.
Question 12
H Limited is an Investment Company preparing its Financial Statements in accordance with
Question 13
Ind AS. The Company obtains funds from various investors and commits its performance for
fair return and capital appreciation to its investors. During the year under audit, it had been JRS Limited holds the majority ownership of R Ltd. & K Ltd. S Ltd. is an intermediate subsidiary
observed that the Company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of of JRS Limited in Surat. The JRS Limited presents the consolidated financial statements for
the respective share capitals of the Investee Companies. When checking the investment schedule audit purposes to MMT & Co. As a statutory auditor MMT & Co. obtain a listing of all the
of the Company, an issue cropped as to whether there would arise any need to consolidate components and verify that all the components included in financial statements unless any
accounts of any such investee companies with those of H Limited in accordance with section component meet criterion for exclusion.
129(3) of the Companies Act, 2013 which contains no exclusion from consolidation. Explain any two reasons which are considered by MMT & Co. for exclusion of components

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from the consolidated financial statements and reporting of reasons of exclusion thereof. (PYP consolidated financial statements, however, based on section 129(4) and circular issued by MCA, it
5 Marks, Jan ‘21) can be construed that, even in consolidated financial statements under Ind AS, only those disclosures
Answer 13 should be given which are relevant to consolidated financial statements.
Where a component is excluded from the consolidated financial statements, the auditor should examine Based on the above discussion, in case of companies, the information such as the following given in
the reasons for exclusion and whether such exclusion is in conformity with the applicable financial the notes to the separate financial statements of the parent and/or the subsidiary, need not be included
reporting framework. in the consolidated financial statements.
(i) Under Companies (Accounting Standards) Rules, 2006, there could be two reasons for exclusion (i) Source from which bonus shares are issued, e.g., capitalization of profits or reserves or from
of subsidiary, associate or jointly controlled entity- one, that the relationship of parent with the securities premium account.
subsidiary, associate or jointly controlled entity is intended to be temporary or the subsidiary, (ii) Disclosure of all unutilized monies out of the issue indicating the form in which such unutilized
associate or joint venture operates under severe long-term restrictions which significantly impair funds have been invested.
its ability to transfer funds to the parent. (iii) Disclosure required under Micro, Small and Medium Enterprises Development Act, 2006.
(ii) Similarly, under the Companies Act, 2013, intermediate subsidiary in India is not required to (iv) A statement of investments (whether shown under “financial assets or non-financial assets as
present consolidated financial statements. Ind AS 110 also prescribes certain criteria where stockin-trade) separately classifying trade investments and other investments, showing the
consolidated financial statements are not required. In such cases, the auditor should satisfy names of the bodies corporate (indicating separately the names of the bodies corporate under
himself that the exclusion made by the management falls within these categories, example in the same management) in whose shares or debentures, investments have been made (including
the case of an entity which is excluded from consolidation on the ground that the relationship all investments, whether existing or not, made subsequent to the date as at which the previous
of parent with the other entity as subsidiary, associate or joint venture is temporary, the auditor balance sheet was made out) and the nature and extent of the investment so made in each such
should verify that the intention of the parent, to dispose off the subsidiary, investment in associate body corporate.
or interest in jointly controlled entity, in the near future, existed at the time of acquisition of the
subsidiary, making investment in associate or jointly controlled entity. (v) Value of imports calculated on C.I.F. basis by the company during the financial year in respect of:
(iii) The auditor should also verify that the reasons for exclusion are given in the consolidated financial (a) raw materials;
statements. If an entity is excluded from the consolidated financial statements for reasons other (b) components and spare parts;
than those allowed by the applicable financial reporting framework, the auditor should consider (c) capital goods.
its effect on the auditor’s report to be issued.
(vi) Expenditure in foreign currency during the financial year on account of royalty, know- how,
professional and consultation fees, interest, and other matters.
Question 14 (vii) Value of all imported raw materials, spare parts and components consumed during the financial
ABC Limited holds 51% equity of BBB Limited, 63% equity of TTT Limited. There are different year and the value of all indigenous raw materials, spare parts and components similarly
information and explanations which are disclosed by the respective companies in the notes consumed and the percentage of each to the total consumption.
to their financial statements. At the time of consolidation, management of ABC Limited has (viii) The amount remitted during the year in foreign currencies on account of dividends, with a
consolidated all the information and explanations disclosed in the notes as well. The principal specific mention of the number of non-resident shareholders, the number of shares held by them
auditor is of the view that only those information and explanations should form part of the notes on which the dividends were due and the year to which the dividends related.
to the consolidated financial statements which are relevant at group level. Please mention any
(ix) Earnings in foreign exchange classified under the following heads, namely:
five aspects which are given in the notes to the separate financial statements of the parent and
the subsidiaries, need not be included in the consolidated financial statements. (PYP 5 Marks (a) export of goods calculated on F.O.B. basis;
Nov 22) (b) royalty, know-how, professional and consultation fees;
Answer 14 (c) interest and dividend;
The Ind AS 110 does not give a list of information which is part of the separate financial statement (d) other income, indicating the nature thereof.
of the components but that need not be reported in the notes and other explanatory material of the
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Multiple Choice Questions MCQ Exchanges, Registrar of Companies in India and others. The turnover of the Group is INR
15,000 crores and many of its components have significant operations at standalone level.
Question 1
The Group is audited by one audit firm, Seema & Co LLP. For the purpose of group audit of the
Brown Ltd is a holding company with two subsidiaries Black Ltd and White Ltd. You have
current year, the auditors have considered perfoming testing of journal entries across the group
been given the task of covering the valuation of non-current tangible assets in the consolidated
to address the significant risk, however, the auditors are facing challenges to perform this audit
financial statements. You note that Black Ltd and Brown Ltd. adopt straight line method of
procedure across the group because of the volume and limitation of resources. Please suggest
depreciation for its assets whereas White Ltd, follows written down method for calculating the
the correct options in respect of this matter. (MTP 2 Marks, April 19)
depreciation. Which of the following adjustment would be considered as correct in respect of
the consolidated financial statements preparation? (a) The Group auditors have a choice to test journal entries of the components which is also backed
up by the auditing standards.
(a) White Ltd is required to depreciate the assets adopting straight line method of depreciation which
is the method adopted by the holding company. (b) The Group auditors must test journal entries of all components.
(b) Brown Ltd is required to make suitable adjustments as to the depreciation charged by White Ltd, (c) The Group auditors need not test journal entries of components requiring analytical response at
at the time of consolidation. group level.
(c) Brown Ltd and Black Ltd are required to depreciate the assets adopting written down value as to (d) The Group auditors need not test journal entries of components scoped with com prehensive approach.
facilitate the harmonization of accounting policies. Answer 3 : (c)
(d) No adjustment is required as there can be different methods of calculation of depreciation for its
assets for the group companies. (MTP 2 Marks Mar 19)
Question 4
Answer 1 : (d)
Shrenik Ltd. was set up initially as a private limited company. Subsequently, it got converted into
a public company. The company’s management has plans of expansion, but the business was not
Question 2 growing in an organic manner. Therefore, the management decided to acquire the competitors.
During the financial year ended 31st March, 2021, the company acquired two companies in
B Limited controls entity C Limited (75%) and entity A Limited (an investment company).
India and France in September, 2020 and January, 2021 respectively. The company controls
Entity B Limited reduced the control of entity C Limited from 75% to 60%. With regard to
both of these companies as per the criteria’s laid down in the Companies Act, 2013 as well as the
that certain adjustments were made to account for the change in the shareholding of entity C
applicable accounting standards.
Limited which is consolidated. These adjustments are known as:
The management started discussions with the auditors regarding the audit wherein it was also
(a) Memorandum adjustments.
pointed out by the auditors that the management should also prepare consolidated financial
(b) Current period consolidation adjustments. statements, if they want.
(c) Permanent consolidation adjustments. Management needs your advise on the same.
(d) Temporary period consolidation adjustments. (MTP 1 Marks, March 21) (a) Management must prepare the consolidated financial statements as per the requirements of the
Answer 2 : (c) Companies Act, 2013.
(b) Management has a choice not to prepare consolidated financial statements but should go for that
considering that its true performance and financial position can then be demonstrated.
Question 3
(c) Management could have prepared consolidated financial statements if the acquired companies
NT 22 Group is a large group comprising of 22 subsidiary companies, 14 associate companies and
would have completed at least one year post acquisition.
19 joint ventures. NT Ltd. is the holding company which is also listed on Bombay Stock Exchange
and New York Stock Exchange. The Group prepares its consolidated financial statements every (d) Management must prepare consolidated financial statements, but it should include only the
quarter for various reporting requirements – SEBI (Stock and Exchange Board of India), Stock company acquired in India. (MTP 1 Mark Oct 21)
Answer 4 : (a)
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Question 5 b. Auditor should look at the materiality and conservatism principle. Company has included extra
Rimmi Ltd. was set up initially as a private limited company. Subsequently, it got converted into a information in the financials which can be considered by the auditors and basis that clean audit
public company. The company’s management has plans of expansion but the business was not growing report should be given.
in an organic manner. Therefore, the management decided to acquire the competitors. During the c. Management should restate the financials to adjust the error related to consolidation of joint
financial year ended 31st March, 2021, the company acquired two companies in India and France in ventures in standalone financial statements. Otherwise, auditor may modify his opinion on current
September, 2020 and January, 2021 respectively. The company controls both of these companies as per year’s financial statements considering the materiality.
the criteria laid down in the Companies Act, 2013 as well as the applicable accounting standards.
d. As per the requirements of IND AS, joint venture if consolidated in standalone financial statements
The management started discussions with the auditors regarding the audit wherein it was also
should not be consolidated again in the consolidated financial statements. Basis that this point
pointed out by the auditors that the management should also prepare consolidated financial
should be dropped by the auditor. (MTP 1 Mark March ’23, RTP May’19)
statements (CFS), if they want. Management needs your advise on the same.
Answer 6 : (c)
(a) Management must prepare the CFS as per the requirements of the Companies Act, 2013.
(b) Management has a choice not to prepare CFS but should go for that considering that its true
performance and financial position can then be demonstrated. Question 7
(c) Management could have prepared CFS if the acquired companies would have completed at least WCO Private Ltd is a joint venture of WCO Gmbh and MSON Ltd. WCO Gmbh is a company
one year post acquisition. based out of Germany and is also listed in Germany. WCO Gmbh prepares its financial
statements as per IFRS. MSON Ltd is a company based out of India and is also listed in India.
(d) Management must prepare CFS but it should include only the company acquired in India. (MTP
MSON Ltd prepares its financial statements as per Ind AS. For the purpose of reporting of
1 Mark April 22)
financial information to WCO Gmbh and MSON Ltd for consolidation purposes, WCO Private
Answer 5 : (a) Ltd uses reporting package (which comprises of balance sheet, profit and loss and other notes
to accounts). WCO Private Ltd prepares its financial statements as per Ind AS.
Question 6 WCO Private Ltd has taken useful life of some fixed assets in its Ind AS financial statements based on
their useful lives which is different from the useful lives of similar nature fixed assets taken by WCO
Shanti Ltd is in the business of construction and infrastructure. The company is listed in India
Gmbh (in line with their accounting policies). The reporting package of WCO Private Ltd is audited
having an annual turnover of INR 3500 crore. The company has various projects offices/
operations in India and outside India. The functional currency of the company and its project before reporting to WCO Gmbh. The auditor audits the reporting package which is prepared in line
offices is INR. The company has five joint ventures and various jointly controlled operations. The with the Group accounting policies of WCO Gmbh and mentions in his report that the reporting
company has been audi ted by Sudarshan & Associates, a firm of Chartered Accountants, since package has been prepared as per the Group accounting policies of WCO Gmbh.
beginning. During the year ended 31 March 2022, new auditors were appointed as the statutory WCO Private Ltd makes an adjustment for changes in useful lives in the reporting package on
auditors of the company for the audit of the financial statements for the year ended 31 March the basis of Group accounting policies of WCO Gmbh. The auditor has asked the management
2022. New statutory auditors have raised various points related to the consolidation procedures to take same useful lives of fixed assets in the reporting package which have also been taken
followed by the company. Management did not agree to the observations of the auditors as by them in its Ind AS financial statements. Management has not agreed with the view of the
they have been following this since many years now and there was no observation of previous
auditor. Please suggest the right course of action.
auditors in respect of the same. Auditors have highlighted a point that joint ventures have been
consolidated by the company in its standalone financial statements. However, management has (a) Position taken by the management is correct.
an argument that those are in the nature of its operations and hence to reflect the true and fair (b) Position suggested by the auditor is correct and if the management does not agree then auditor
view it would be appropriate to consolidate the same in the standalone financial statements. may have to modify his report on the basis of materiality.
Please advise as auditors how would you deal with this matter.
(c) The matter relates to an estimate (i.e. useful life) which may be subject to changes under different
a. Since the matter is related to consolidation, which is more relevant for consolidated financial GAAPs and hence auditor should ignore this point.
statements, hence no reporting in respect of this matter would be required in the auditor’s report
(d) The report would be for special purpose which should always be a clean report. (RTP May 19)
for the year ended 31 March 2022.
Answer 7 The answer is (a).
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Whether preparation of consolidated financial statements is mandatory? If yes, please elaborate While doing the audit of Consolidated Financial Statements, which current period consolidation
on the requirements under the statute. adjustments are to be taken into account?
Answer 1 Answer 3
According to Section 129(3) of the Companies Act, 2013, where a company has one or more Current period consolidation adjustments primarily relate to the elimination of intra-group transactions
subsidiaries, including associate company and joint venture, it shall, in addition to its own financial and account balances including:
statements prepare a consolidated financial statement of the company and of all the subsidiaries in (a) intra-group interest paid and received, or management fees, etc.;
the same form and manner as that of its own. Further, section 129(4) of the said Act, provides that the
(b) unrealised intra-group profits on assets acquired/ transferred from/ to other subsidiaries;
provisions applicable to the preparation, adoption and audit of the financial statements of a holding
company shall, mutatis mutandis, also apply to its the consolidated financial statements. (c) record deferred taxes on unrealised intercompany profits elimination in accordance with Ind AS
12;
However, the requirement related to preparation of consolidated financial statements shall not apply
(d) intra-group indebtedness;
to a company if it meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its (e) adjustments related to harmonising the different accounting policies being followed by the parent
other members, including those not otherwise entitled to vote, having been intimated in writing and its components;
and for which the proof of delivery of such intimation is available with the company, do not (f) adjustments to the financial statements (of the parent and the components being consolidated) for
object to the company not presenting consolidated financial statements; recognized subsequent events or transactions that occur between the balance sheet date and the
(ii) it is a company whose securities are not listed or are not in the process of listing on any stock date of the auditor’s report on the consolidated financial statements of the group.
exchange, whether in India or outside India; and (g) adjustments for the effects of significant transactions or other events that occur between the date of
(iii) its ultimate or any intermediate holding company files consolidated financial statements with the components balance sheet and not already recognised in its financial statements and the date of
the Registrar which are in compliance with the applicable Accounting Standards. the auditor’s report on the group’s consolidated financial statements when the financial statements
of the component to be used for consolidation are not drawn upto the same balance sheet date as
Question 2 that of the parent;
Please elaborate on the situations wherein the requirement related to preparation of consolidated (h) In case of a foreign component, adjustments to convert a component’s audited financial statements
financial statements may not apply. prepared under the component’s local GAAP to the GAAP under which the consolidated financial
statements are prepared;
Answer 2
(i) determination of movement in equity attributable to the minorities interest/non-controlling interest
The requirement related to preparation of consolidated financial statements shall not apply to a since the date of acquisition of the subsidiary. It should also be noted that under Ind AS, non-
company if it meets the following conditions: controlling interest can also result in negative balance. Unlike earlier AS, as per paragraph 28 of
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its Ind AS 27, if the net worth of subsidiary is negative, non-controlling interest could have deficit
other members, including those not otherwise entitled to vote, having been intimated in writing balance;
and for which the proof of delivery of such intimation is available with the company, do not (j) adjustments of deferred tax on account of temporary differences arising out of elimination of profit
object to the company not presenting consolidated financial statements; and losses resulting from intragroup transactions and undistributed profits of the component in
(ii) it is a company whose securities are not listed or are not in the process of listing on any stock case of consolidated financial statements prepared under Ind AS.
exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements with the
Registrar which are in compliance with the applicable Accounting Standards.

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Question 4 It may happen that while working out the permanent consolidation adjustments, in the case of one
Write a short note on subsidiary, goodwill arises and in the case of another subsidiary, capital reserve arises. The parent may
choose to net off these amounts to disclose a single amount in the consolidated balance sheet where
a) Responsibility of holding company for preparation of Consolidated Financial Statements.
permitted by the applicable financial reporting framework. In such cases, the auditor should verify
b) Permanent Consolidated Adjustments. that the gross amounts of goodwill and capital reserves arising on acquisition of various subsidiaries
Answer 4 have been disclosed in the notes to the consolidated financial statements to reflect the excess/shortage
over the parents’ portion of the subsidiary’s equity.
(a) The responsibility for the preparation and presentation of consolidated financial statements, among
other things, is that of the management of the parent. This includes:
(a) identifying components, and including the financial information of the components to be included Question 5
in the consolidated financial statements; R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock-
(b) where appropriate, identifying reportable segments for segmental reporting; in-trade” in its accounts. The shares are held exclusively with a view to their subsequent disposal
in the near future. R Ltd. represents that while preparing Consolidated Financial Statements, S
(c) identifying related parties and related party transactions for reporting;
Ltd. can be excluded from the consolidation. As a Statutory Auditor, how would you deal?
(d) obtaining accurate and complete financial information from components;
Answer 5
(e) making appropriate consolidation adjustments;
Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary
(f) harmonization of accounting policies and accounting framework; and control’, or “for operation under severe long-term funds transfer restrictions” and consolidation is
(g) GAAP conversion, where applicable. mandatory for Ind AS compliant financial statement in this case. Paragraph 20 of Ind AS 110 states
that “Consolidation of an investee shall begin from the date the investor obtains control of the investee
Apart from the above, the parent ordinarily issues instructions to the management of the component
and cease when the investor loses control of the investee”.
specifying the parent’s requirements relating to financial information of the components to be
included in the consolidated financial statements. The instructions ordinarily cover the accounting However, as per Section 129(3) of the Companies Act, 2013 read with rule 6 of the Companies
policies to be applied, statutory and other disclosure requirements applicable to the parent, including (Accounts) Rules, 2014, where a company having subsidiary, which is not required to prepare
the identification of and reporting on reportable segments, and related parties and related party consolidated financial statements under the Accounting standards, it shall be sufficient if the company
transactions, and a reporting timetable. complies with the provisions on consolidated financial statements provided in Schedule III to the Act.
(b) Permanent consolidation adjustments are those adjustments that are made only on the first occasion In the given case, R Ltd’s intention is to dispose off the shares in the near future as shares are being
or subsequent occasions in which there is a change in the shareholding of a particular entity which held as stock in trade and it is quite clear that the control is temporary, Therefore, R Ltd. is required to
is consolidated. Permanent consolidation adjustments are: prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary
control’ is not available under Ind AS 110.
1. Determination of goodwill or capital reserve as per applicable accounting standards
2. Determination of amount of equity attributable to minority/ non- controlling interests
Question 6
The auditor should verify that the above calculations have been made appropriately.
A Ltd. holds the ownership of 10% of voting power and control over the composition of Board
• The auditor should pay particular attention to the determination of pre-acquisition reserves of the
of Directors of B Ltd. While planning the statutory audit of A Ltd., what factors would be
components. Date(s) of investment in components assumes importance in this regard.
considered by you as the statutory auditors of A Ltd for the audit of its consolidated financial
• The auditor should also examine whether the pre-acquisition reserves have been allocated appropriately statements prepared under Ind AS?
between the parent and the minority interests/ non-controlling interests of the subsidiary.
Answer 6
• The auditor should also verify the changes that might have taken place in these permanent
10% Voting Power and Control over the composition of Board of Directors: In this case, A Ltd. holds
consolidation adjustments on account of subsequent acquisition of shares in the components,
only 10 percent of the voting power but has control over the composition of the Board of Directors
disposal of the components in the subsequent years.
of B Ltd.
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In such a case, A Ltd shall be considered as a parent of B Ltd and, therefore, it would consolidate B Answer 7
Ltd in its consolidated financial statements as a subsidiary. a) When the Parent’s Auditor is also the Auditor of all its Components
The auditor should verify A Ltd’s management’s assessment of having control in B Ltd despite having While drafting the audit report, the auditor should report:
only 10% voting power as per the requirements of Ind AS 110. Auditor would need to verify as to how
• Whether principles and procedures for preparation and presentation of consolidated financial
A Ltd controls the composition of the Board of Directors or corresponding governing body of B Ltd.
statements as laid down in the relevant accounting standards have been followed.
There can be various means by which such kind of control can be established. In this regard, the
• In case of any departure or deviation, the auditor should consider the requirements given in SA 705,
auditor may verify the minutes of Board meetings, shareholder agreement entered into by the parent,
Modifications to the Opinion in the Independent Auditor’s reports in the audit report so that users
agreements with B Ltd to which the parent might have provided any technology or know how,
of the consolidated financial statements are aware of such deviation.
enforcement of statute, etc.
• Auditor should issue an audit report expressing opinion whether the consolidated financial
Further, the auditor should verify that the adjustments warranted by Ind AS 110 have been made
statements give a true and fair view of the state of affairs of the Group as on balance sheet date
wherever required and have been properly authorised by the management of the parent. The
and as to whether consolidated profit and loss statement gives true and fair view of the results of
preparation of consolidated financial statements gives rise to permanent consolidation adjustments
consolidated profit or losses of the Group for the period under audit.
and current period consolidation adjustments. The auditor should make plan, among other things, for
the understanding of accounting policies of the A Ltd and B Ltd and determining and programming • Where the consolidated financial statements also include a cash flow statement, the auditor should
the nature, timing, and extent of the audit procedures to be performed etc. also give his opinion on the true and fair view of the cash flows presented by the consolidated cash
flow statements.
Further, the duties of an auditor with regard to reporting of transactions with any other related parties
are given in SA 550 on Related Parties. As per SA 550 on, “Related Parties”, the auditor should review b) When the Parent’s Auditor is not the Auditor of all its Components
information provided by the management of the entity identifying the names of all known related In a case where the parent’s auditor is not the auditor of all the components included in the consolidated
parties. A person or other entity that has control or significant influence, directly or indirectly through financial statements, the auditor of the consolidated financial statements should also consider the
one or more intermediaries, over the reporting entity are considered as Related Party. requirement of SA 600.
In forming an opinion on the financial statements, the auditor shall evaluate whether the identified As prescribed in SA 706, if the auditor considers it necessary to make reference to the audit of the
related party relationships and transactions have been appropriately accounted for and disclosed in other auditors, the auditor’s report on the consolidated financial statements should disclose clearly the
accordance with Ind AS 110 and Schedule III and whether the effects of the related party relationships magnitude of the portion of the financial statements audited by the other auditor(s).
and transactions prevent the financial statements from achieving true and fair presentation (for fair
This may be done by stating aggregate rupee amounts or percentages of total assets, revenues and
presentation frameworks) or cause the financial statements to be misleading (for compliance frameworks).
cash flows of components included in the consolidated financial statements not audited by the parent’s
auditor.
Question 7 Total assets, revenues and cash flows not audited by the parent’s auditor should be presented before
You are appointed as an auditor of Nawab Limited, a listed company who is a main supplier giving effect to permanent and current period consolidation adjustments.
to the UK building and construction market. With a turnover of ` 2.9 billion, the company Reference in the report of the auditor on the consolidated financial statements to the fact that part of
operates through 11 business units and has nearly 180 branches across the countries. the audit of the group was made by other auditor(s) is not to be construed as a qualification of the
As an auditor, how will you draft the report in case: opinion but rather as an indication of the divided responsibility between the auditors of the parent and
its subsidiaries.
a) When the Parent’s Auditor is also the Auditor of all its Components?
c) When the Component(s) Auditor Reports on Financial Statements under an Accounting
b) When the Parent’s Auditor is not the Auditor of all its Components?
Framework Different than that of the Parent
c) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework
Different than that of the Parent? The parent may have components located in multiple geographies outside India applying an accounting
framework (GAAP) that is different than that of the parent in preparing its financial statements. Foreign
d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of the Parent?
components prepare financial statements under different financial reporting frameworks, which may
e) Where the financial statements of one or more components is not audited?
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be a well-known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of the audits and audit procedures can be performed by the auditor reporting on the consolidated financial
component. statements or by the components’ auditor.
Local component auditors may be unable to report on financial statements prepared using the parent’s Where the financial statements of one or more components continue to remain unaudited, the
GAAP because of their unfamiliarity with such GAAP. auditor reporting on the consolidated financial statements should consider unaudited components
When a component’s financial statements are prepared under an accounting framework that is different in evaluating a possible modification to his report on the consolidated financial statements. The
than that of the framework used by the parent in preparing group’s consolidated financial statements, evaluation is necessary because the auditor (or other auditors, as the case may be) has not been able to
the parent’s management perform a conversion of the components’ audited financial statements from obtain sufficient appropriate audit evidence in relation to such consolidated amounts/balances. In such
the framework used by the component to the framework under which the consolidated financial cases, the auditor should evaluate both qualitative and quantitative factors on the possible effect of
statements are prepared. The conversion adjustments are audited by the principal auditor to ensure such amounts remaining unaudited when reporting on the consolidated financial statements using the
that the financial information of the component(s) is suitable and appropriate for the purposes of guidance provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”.
consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s accounting Question 8
policies, as outlined in the group accounting manual, to facilitate the preparation of the group’s
M Ltd. acquired 51 % shares of S Ltd. on 01-04-2019 and sold 25% of these shares during
consolidated financial statements. The group accounting manual would normally contain all accounting
the financial year 2019-20. M Ltd. did not prepare Consolidated Financial Statements for the
policies, including relevant disclosure requirements, which are consistent with the requirements of the
financial year 2019-20 on the plea that the control was only temporary. Do you agree with the
financial reporting framework under which the group’s consolidated financial statements are prepared.
view of M Ltd.? Decide, assuming, that M Ltd. is required to prepare its financial statements
The local component auditor can then audit and issue an audit report on the components financial under Ind AS.
statements prepared in accordance with “group accounting policies”.
Answer 8
When applying the approach of using group accounting policies as the financial accounting framework
Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary
for components to report under, the principal/parent auditors should perform procedures necessary to
control’, or “for operating under severe long-term funds transfer restrictions” and consolidation is
determine compliance of the group accounting policies with the GAAP applicable to the parent’s
mandatory for Ind AS compliant financial statement in this case.
financial statements. This ensures that the information prepared under the requirements of the group
accounting policies will be directly usable and relevant for the preparation of consolidated financial Ind AS 110 states that “Consolidation of an investee shall begin from the date the investor obtains
statements by the parent entity, eliminating the need for auditing by the auditor, the differences control of the investee and cease when the investor loses control of the investee”.
between the basis used for the component’s financial statements and that of the consolidated financial In the given case, M Ltd acquired 51% shares of S Ltd on 01.04.2019 and sold 25% shares during the
statements. The Principal auditor can then decide whether or not to rely on the components’ audit year ended 2019-20. M Ltd did not consolidate the financial statements of S Ltd for the year ended
report and make reference to it in the auditor’s report on the consolidated financial statements. 31.03.2020 on the plea that control was only temporary. The intention of M Ltd. is quite clear that the
d) When the Component(s) Auditor Reports under an Auditing Framework Different than that control in S Ltd. is temporary as the former company disposed of the acquired shares in the same year
of the Parent of its purchase.
Normally, audits of financial statements, including consolidated financial statements, are performed However, even though the intention of M Ltd. is for temporary holding of shares in S Ltd. as per Ind
under auditing standards generally accepted in India (“Indian GAAS”). AS, M Ltd is required to prepare Consolidated Financial Statements in accordance with Ind AS 110
as exemption for ‘temporary control’ is not available under Ind AS 110. However, “Consolidation of
In order to maintain consistency of the auditing framework and to enable the parent auditor to rely and
an investee shall begin from the date the investor obtains control of the investee and cease when the
refer to the other auditor’s audit report in their audit report on the consolidated financial statements,
investor loses control of the investee”. Here, due to sale of investment in S Ltd. up to 25%, M Ltd.
the components’ financial statements should also be audited under a framework that corresponds to
loses control of S Ltd.
Indian GAAS.
Accordingly, M Ltd., is required to prepare consolidated statement till the date of disposal of the 25%
e) Components Not Audited
shares to comply with the same.
Generally, the financial statements of all components included in consolidated financial statements
should be audited or subjected to audit procedures in the context of a multi-location group audit. Such
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H Limited is an Investment Company preparing its Financial Statements in accordance with Venus Ltd. is a company engaged in the manufacture of stainless steel items. The company operates
Ind AS. The Company obtains funds from various investors and commits its performance for through 5 business units and has 35 branches across India. Manglam & Associates are being
fair return and capital appreciation to its investors. During the year under audit, it had been appointed as the principal auditor of the company. While accepting the audit assignment as the
observed that the Company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of principal auditor, what will be the points of consideration for the principal auditor of the company?
the respective share capitals of the Investee Companies. When checking the investment schedule Answer 10
of the Company, an issue cropped as to whether there would arise any need to consolidate
Acceptance as Principal Auditor: The principal auditor, Manglam & Associates, should consider
accounts of any such investee companies with those of H Limited in accordance with section
whether their own participation is sufficient to be able to act as the principal auditor. For this purpose,
129(3) of the Companies Act, 2013 which contains no exclusion from consolidation.
the auditor would consider:
Analyse the issues involved and give your views.
a) the materiality of the portion of the financial information which the principal auditor audits;
Answer 9
b) the principal auditor’s degree of knowledge regarding the business of the components;
Consolidated Financial Statements: According to Section 129(3) of the Companies Act, 2013, where
c) the risk of material misstatements in the financial information of the components audited by the
a company has one or more subsidiaries, including associate company and joint venture, it shall, in
other auditor; and
addition to its own financial statements prepare a consolidated financial statement of the company and
of all the subsidiaries in the same form and manner as that of its own. d) the performance of additional procedures as set out in this SA regarding the components audited
by other auditor resulting in the principal auditor having significant participation in such audit.
Further, as per Companies (Accounts) Rules, 2014, the consolidation of financial statements of the
company shall be made in accordance with the provisions of Schedule III to the Act and the applicable
accounting standards. However, a company which is not required to prepare consolidated financial
Question 11
statements under the Accounting Standards, it shall be sufficient if the company complies with
provisions on consolidated financial statements provided in Schedule III of the Act. Venus Ltd. is a curtain manufacturing company having its corporate office in Punjab. The
company is in the process of expansion and has acquired four companies during the year.
However, an investment entity need not present consolidated financial statements if it is required, in
Pradyuman & Co.is the principal auditor of the company while the audit of all the companies
accordance with Ind AS 110‘Consolidated Financial Statements’, to measure all of its subsidiaries at
acquired during the year is being conducted by Jha & Jha Associates. During the course of audit,
fair value through profit or loss. A parent shall determine whether it is an investment entity.
CA Pradyuman, the engagement partner asked the management of Venus Ltd. at the corporate
(An investment entity is an entity that(a) obtains funds from one or more investors for the purpose of office that in order to conduct the audit of the consolidated financial statements, his audit firm
providing those investor(s) with investment management services; (b) commits to its investor(s) that is required to conduct audit of the financial statements of all the components also (Companies
its business purpose is to invest funds solely for returns from capital appreciation, investment income, acquired during the year). To this, the management asked CA Pradyuman to consider the audit
or both; and (c) measures and evaluates the performance of substantially all of its investments on a reports of the component auditor already provided to his audit team and to communicate with
fair value basis.) the component auditor for any discussion they wish to have. CA Pradyuman contended that for
In the given case, H Limited is an investment company preparing its financial statements in accordance the purpose of audit of consolidated financial statements either his firm is required to conduct
with Ind AS and the company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the an audit of all the component’s financial statements or he needs the working papers of the
respective share capitals of the investee companies. In view of provisions discussed in Ind AS 110, the component auditors. Is the contention of CA Pradyuman correct?
Company is not required to prepare consolidated financial statements however, for the compliance of Answer 11
Companies (Accounts) Rules, 2014, it shall be sufficient if the company complies with provisions on
As per SA 600, “Using the work of Another auditor”, the principal auditor is normally entitled to
consolidated financial statements provided in Schedule III of the Act.
rely upon the work of component auditor unless there are special circumstances to make it essential
Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as prescribed by law for him to visit the component and/or to examine the books of account and other records of the said
and if they give some exemption it should be followed. If out of exemption some subsidiaries are not component. The principal auditor might discuss with the other auditor the audit procedures applied or
consolidated, then list should be disclosed in notes to accounts with reason. review a written summary of the other auditor’s procedures and findings which may be in the form of
a completed questionnaire or check-list.
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The principal auditor may also wish to visit the other auditor. The nature, timing and extent of Answer 12
procedures will depend on the circumstances of the engagement and the principal auditor’s knowledge In terms of SA 600 “Using the Work of Another auditor”, where another auditor has been appointed
of the professional competence of the other auditor. for the component, the principal auditor would normally be entitled to rely upon the work of such
The principal auditor should consider the significant findings of the other auditor. auditor unless there are special circumstances to make it essential for him to visit the component and/
The principal auditor may consider it appropriate to discuss with the other auditor and the management or to examine the books of account and other records of the said component. When planning to use
of the component, the audit findings or other matters affecting the financial information of the the work of another auditor, the principal auditor should consider the professional competence of the
components. He may also decide that supplemental tests of the records or the financial statements of other auditor in the context of specific assignment if the other auditor is not a member of the Institute
the component are necessary. Such tests may, depending upon the circumstances, be performed by the of Chartered Accountants of India.
principal auditor or the other auditor. The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that
Accordingly, CA Pradyuman, can perform the above mentioned audit procedures. However, the audit the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the
of the component’s financial statements by the principal auditor is not required. specific assignment.
So, the contention of CA Pradyuman that for the purpose of audit of consolidated financial statements The principal auditor might discuss with the other auditor the audit procedures applied or review
he is required to conduct an audit of the components financial statements is not correct. a written summary of the other auditor’s procedures and findings which may be in the form of a
completed questionnaire or check-list.
Further, SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality Control (SQC)
1, provides that, unless otherwise specified by law or regulation, audit documentation is the property Accordingly, CA Kukreja is correct in asking the branch auditors to share with him the summary of
of the auditor. He may at his discretion, make portions of, or extracts from, audit documentation their audit procedures and findings in respect of the accounts of the branches examined by them.
available to clients, provided such disclosure does not undermine the validity of the work performed, Further, CA Kukreja has asked one of the branch auditors to share with him the working papers with
or, in the case of assurance engagements, the independence of the auditor or of his personnel. respect to the branches examined by such branch auditor for the former’s review and return.
Accordingly, it is the discretion of the component auditor as the working papers with respect to the SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality Control (SQC) 1, provides
components examined by the component auditor are the property of the component auditor. that, unless otherwise specified by law or regulation, audit documentation is the property of the auditor.
So, the contention of CA Pradyuman is not correct. He may at his discretion, make portions of, or extracts from, audit documentation available to clients,
provided such disclosure does not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the auditor or of his personnel.
Question 12 Accordingly, it is the discretion of the branch auditor as the working papers with respect to the branches
Kukreja & Associates is the principal auditor of MN Ltd. The company is engaged in the examined by the branch auditor are the property of the branch auditor.
manufacture of sports items and operates through its 14 branches all over India. With respect So, CA Kukreja is not correct in asking the branch auditor to share with him the working papers with
to the audit of branches, the company has appointed seven Chartered Accountant firms, each respect to the branches examined by the branch auditor.
firm conducting the audit of two branches.
The audit reports in respect of accounts of branches have already been sent to the principal
auditor. While analysing the work of the branch auditors, CA Kukreja, the engagement partner, Question 13
asked the branch auditors to share with him a summary of the audit procedures and findings CA. Mukund is in the second year of his term as statutory auditor of Style Marks Limited
in respect of the accounts of the branches examined by them. CA Kukreja also asked one of the (Holding company), its subsidiaries and joint ventures. At the time of planning audit, he wants
branch auditor to share his working paper with respect to the two branches examined by that to be sure that all the components have been included in the consolidated financial statements.
branch auditor for his review and return. Is the principal auditor correct in asking the branch List out some procedures he should perform to verify completeness of this information.
auditors for sharing the summary and the working papers for his review? Answer 13
The auditor should verify that all the components have been included in the consolidated financial
statements unless these components meet criterion for exclusion. In respect of completeness of this
information, the auditor should perform the following procedures:
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(a) review his working papers for the prior years for the known components Total assets ` 1500 crore
(b) review the parent’s procedures for identification of various components Total revenues ` 1000 crore
(c) make inquiries of management to identify any new components or any component which goes out Net cash outflows ` 10 crore
of consolidated financial statements
Two of these subsidiaries are located outside India whose financial statements have been
(d) review the investments of parent as well as its components to determine the shareholding in other prepared in accordance with accounting principles generally accepted in their respective
entities countries and which have been audited by other auditors under generally accepted auditing
(e) review the joint ventures and joint arrangements as applicable standards applicable in their respective countries.
(f) review the other arrangements entered into by the parent that have not been included in the Where and how such information should be included in independent auditor’s report on
consolidated financial statements of the group consolidated financial statements of company? Also draft a suitable para by making necessary
assumptions.
(g) review the statutory records maintained by the parent, for example registers under section 186,
190 of the Companies Act, 2013 Answer 15
(h) also identify the changes in the shareholding that might have taken place during the reporting period. In a case where the parent‘s auditor is not the auditor of all the components included in the
consolidated financial statements, then as prescribed in SA 706, if the auditor considers it necessary
to make reference to the audit of the other auditors, the auditor’s report on the consolidated financial
Question 14 statements should disclose clearly the magnitude of the portion of the financial statements audited by
CA. Kajal Gupta is nearing completion of audit of consolidated financial statements of the other auditors. This may be done by stating aggregate rupee amounts or percentages of total assets,
Rubic Paints and Chemicals Limited. She requires written representations from the parent’s revenues and cash flows of components included in the consolidated financial statements not audited
management on matters material to the consolidated financial statements. What specific matters by the parent‘s auditor.
such written representations can include? It should be included in Other Matter paragraph of independent auditor’s report. The draft “Other
Answer 14 Matter Paragraph” is as under: -
The auditor of the consolidated financial statements should obtain written representations from Other Matter Paragraph
parent ‘s management on matters material to the consolidated financial statements. Examples of such We did not audit the financial statements and other financial information, in respect of eight (8)
representations include: subsidiaries, whose financial statements include total assets of Rs.1500 crores as at March 31, 2023,
(a) Completeness of components included in the consolidated financial statements; and total revenues of Rs.1,000 crores and net cash outflow of Rs. 10 crores for the year ended on that
date. These financial statements and other financial information have been audited by other auditors
(b) Identification of reportable segments for segment reporting
and such financial statements, other financial information and auditor’s reports have been furnished
(c) Identification of related parties and related party transactions for reporting to us by the management of the Holding Company.
(d) Appropriateness and completeness of permanent and current period consolidation adjustments, Our opinion on the consolidated financial statements, in so far as it relates to the amounts and
including the elimination of intra-group transactions. disclosures included in respect of these subsidiaries and joint ventures, and our report in terms of sub-
sections (3) of Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries is based solely
on the reports of such other auditors.
Question 15
Two of these subsidiaries are located outside India whose financial statements and other financial
CA.MV Chitale is auditor of consolidated financial statements of “D and D Limited” for year information have been prepared in accordance with accounting principles generally accepted in their
2022-23. The consolidated financial statements consist of financial statements and financial respective countries and which have been audited by other auditors under generally accepted auditing
information of 8 subsidiaries audited by other auditors. Such financial statements, financial standards applicable in their respective countries. The Holding Company’s management has converted
information and auditor’s reports of subsidiaries have been furnished by management of the the financial statements of such subsidiaries from accounting principles generally accepted in their
“D and D Limited” to him. Following further information is also available in respect of these 8 respective countries to accounting principles generally accepted in India.
subsidiaries for year 2022-23: -
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We have audited these conversion adjustments made by the Holding Company’s management. Our a) The said disclosure is not proper as percentage of consolidated revenue from operations along
opinion in so far as it relates to the balances and affairs of such subsidiaries is based on the report of with respective amount pertaining to holding company and its subsidiaries is also required.
other auditors and the conversion adjustments prepared by the management of the Holding Company b) The said disclosure is not proper as percentage of other comprehensive income along with
and audited by us. respective amount pertaining to holding company and its subsidiaries is also required.
Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory c) The said disclosure is not proper as percentages of consolidated revenue from operations as well as
Requirements is not modified in respect of the above matters with respect to our reliance on the work other comprehensive income along with their respective amounts pertaining to holding company
done and the reports of the other auditors and the financial statements and other financial information and its subsidiaries are also required.
certified by the Management.
d) The said disclosure is proper.
Ans: (b)
Integrated Case Scenario
While auditing consolidated financial statements of YK Industries Limited for the year 2022-23,
2. What should be auditor’s proper course of action pursuant to situation highlighted in para
a manufacturing company whose financial statements are required to be prepared in accordance
[B] relating to financial statements of a foreign subsidiary?
with Division II of Schedule III of Companies Act, 2013, CA. Palash Shah notices as under: -
a) The auditor should insist for drawing up of financial statements of foreign subsidiary to 31St
a) The notes to accounts in respect of consolidated financial statements disclose additional
March,2023. The reason for impracticality is a mere excuse. In case of failure to redraw, he can
information pertaining to the holding company and its subsidiaries. It provides disclosure
modify his opinion in accordance with SA 705.
regarding percentages of consolidated net assets, of consolidated profit and loss and of total
comprehensive income along with their respective amounts pertaining to holding company b) The auditor can accept management’s version.
and its subsidiaries. c) The auditor can accept management’s version. However, it is his duty to verify adjustments made for
b) It is noticed by him that financial statements of one foreign subsidiary included in consolidated effects of significant transactions or events occurring between 1st January 2023 and 31st March,2023.
financial statements are drawn up to 31St December, 2022 in accordance with legal requirements d) The auditor should modify his opinion by quantifying the financial effects of such an inconsistency.
in US. He feels it to be weird and is of the view that consolidated financial statements of
Ans: (c)
group could present a distorted picture. The management, in turn, informs him that it is not
practicable to draw the financial statements of foreign subsidiary to 31st March, 2023.
c) During the year 2022-23, goodwill of Rs.50 crore had arisen on account of the acquisition 3. Which of the following statements is correct in respect of goodwill and other matters described
of a subsidiary during the year and there is no impairment loss as on the balance sheet in the case scenario?
date. Besides, adjustments have been made in consolidated financial statements with respect a) Goodwill represents current period consolidation adjustments. Adjustments relating to intra-group
to intra-group indebtedness and those related to harmonizing different accounting policies indebtedness and those relating to harmonizing different accounting policies being adopted by the
being adopted by parent and its subsidiaries. parent and its subsidiaries represent permanent consolidation adjustments.
d) It is noticed by him that one subsidiary was acquired on 15.6.22. He is in a dilemma as b) Adjustments relating to goodwill, intra-group indebtedness and those relating to harmonizing
regards to the correctness of consolidation of its financial statements in group financial different accounting policies being adopted by parent and its subsidiaries represent current period
statements. consolidation adjustments.
Besides, he is also in the process of finalizing audit report including matters to be reported c) Goodwill represents permanent consolidation adjustments. Adjustments relating to intra-group
under CARO, 2020 in respect of consolidated financial statements. However, he is in a fix in indebtedness and those relating to harmonizing different accounting policies being adopted by the
parent and its subsidiaries represent current-period consolidation adjustments.
respect of manner of reporting under CARO,2020 relating to consolidated financial statements.
d) Goodwill and adjustments relating to harmonizing different accounting policies being adopted
Based upon above information and description, answer the following questions: -
by the parent and its subsidiaries represent permanent consolidation adjustments. Adjustments
1. Considering disclosure of additional information in consolidated financial statements as relating to intra-group indebtedness represent current- period consolidation adjustments.
stated in para (A) of case study, which of the following statements is correct?
Ans: (c)
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4. Which of the following statements is most appropriate regarding consolidation of financial

statements of a subsidiary acquired on 15.6.22?
a) The auditor should verify that income and expenses of subsidiary are included in consolidated
financial statements from the date it gains control of subsidiary and further such income and
expenses are based on the amounts of the assets and liabilities recognized in consolidated financial
statements at the acquisition date.
b) The auditor should verify that income and expenses of subsidiary are included in consolidated
financial statements for the complete financial year and further such income and expenses are
based on the amounts of the assets and liabilities recognized in consolidated financial statements
at the preceding reporting date.
c) The auditor should verify that income and expenses of subsidiary are included in consolidated
financial statements from the date it gains control of subsidiary and further such income and
expenses are based on the amounts of the assets and liabilities recognized in consolidated financial
statements at the preceding reporting date.
d) The auditor should verify that income and expenses of subsidiary are included in consolidated
financial statements for the complete financial year and further such income and expenses are
based on the amounts of the assets and liabilities recognized in consolidated financial statements
at the acquisition date.
Ans: (a)
5. As regards reporting under reporting CARO,2020 in respect of consolidated financial

statements, which of the following is in accordance with requirements of law
a) A separate report providing Clause by Clause reporting under CARO,2020 is required in respect
of specified matters pertaining to parent and all subsidiaries incorporated in India.
b) It would be sufficient if report under CARO,2020 in respect of standalone financial statements is
supplemented with additional information in respect of all subsidiaries incorporated in India.
c) A separate report under CARO, 2020 in respect of all subsidiaries incorporated in India together
is required. It should be annexed with report under CARO,2020 in respect of standalone financial
statements.
d) Reporting of details of subsidiaries together with paragraph numbers of reports under CARO,
2020 of auditors of such companies incorporated in India containing qualifications or adverse
remarks would serve the purpose.
Ans: (d)

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GROUP AUDITS
CA Harshad Jaju
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14
SPECIAL FEATURES
OF AUDIT OF BANKS
CHAPTER & NON-BANKING
FINANCIAL COMPANIES
Question 1
M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing
cash credit limit from U Bank of Rs. 25 crores. The limit availed remained less than Rs. 5.00
crores during all the days of F.Y. 2017-18. The company has not done any credit in cash credit
account during the year as it is operating current account in newly opened another bank branch
adjoining to company premises. The company is having sufficient security of stocks and debtors
and DP of Rs.25.00 crores remains all over the year. The company is availing term loans from
other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U
Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as
Non-Performing Accounts. Now company seeks your opinion. (MTP 4 Marks, Aug 18)
Answer 1
Classification of Account as NPA in case of Multiple Banking: If the account remains overdue for
more than 90 days, the account becomes Non-Performing Assets. The account will also be called as
overdue, if there are not sufficient credits in the cash credit account which even could not serve the
interest charged. In this case, there are no credits in accounts, it means interest has not been served
in the account. Thus, accounts become overdue after 90 days for non-credit of amounts which could
even serve the interest amount. Thus, cash credits will become as NPA if no credits/sale proceeds are
deposited in that account.
However, in multiple banking system, each bank is independent for classification of account as NPA.
If SBI declares the account as NPA due to non-serving of interest amount, other bank will be free and
will not classify the term loan accounts as NPA, if they are regular.
Question 2
INDO Bank appointed your firm of Chartered Accountants as a branch auditor for the financial
year 2018-19. Being head-in-charge of the assignment, while planning, you distributed the work
among your team members and assigned Mr. Pary for verification of bills payable. However,
Mr. Pary, being fresh to the bank audits, needs your guidance. Kindly guide. (MTP 5 Marks,
Oct 19)
Answer 2
Bills Payable: Evaluate the existence, effectiveness and continuity of internal controls over bills
payable. Such controls should usually include the following-
CA Harshad Jaju
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SPECIAL FEATURES OF AUDIT OF BANKS & NON-BANKING FINANCIAL COMPANIES SPECIAL FEATURES OF AUDIT OF BANKS & NON-BANKING FINANCIAL COMPANIES
• Drafts, mail transfers, traveler’s cheques, etc. should be made out in standard printed forms. (2) Examine that no cheque sent or received in clearing is outstanding. As per the practice prevalent
• Unused forms relating to drafts, traveller’s cheques, etc. should be kept under the custody of a among banks, any cheques returned unpaid are accounted for on the same day on which they
responsible officer. were sent in clearing or on the following day.
The bank should have a reliable private code known only to the responsible officers of its branches, (3) Examine that all bills or outstanding cheques sent for collection and outstanding as on the closing
coding and decoding of the telegrams should be done only by such offic ers. date have been credited subsequently.
• The signatures on a demand draft should be checked by an officer with the specimen signature (iii) Examine the large transactions in inter-bank accounts, particularly towards the year-end, to
book. ensure that no transactions have been put through for window-dressing.
• All the telegraphic transfers and demand drafts issued by a branch should be immediately confirmed (iv) Check original deposit receipts in respect of balances in deposit accounts in addition to confirmation
by advices to the branches concerned. On payment of these instruments, the paying branch should certificates obtained from banks in respect of outstanding deposits.
send a debit advice to the originating branch. (v) Check whether these balances are converted into the Indian currency at the exchange rates
Examine an appropriate sample of outstanding items comprised in bills payable accounts with the prevailing on the balance sheet date and ensure compliance with relevant Accounting Standard.
relevant registers. Reasons for old outstanding debits in respect of drafts or other similar instruments
paid without advice should be ascertained.
Question 4
Correspondence with other branches after the year-end (e.g., responding advices received from other
In course of audit of Decent Samaritan Bank as at 31st March, 20 you observed the following:
branches, advices received from other branches in respect of drafts issued by the branch and paid
by the other branches without advice) should be examined specially in so far as large value items The bank’s advance portfolio comprised of significant loans against Life Insurance Policies.
outstanding on the balance sheet date are concerned. Write suitable audit program to verify these advances. (MTP 2 Marks, March’ 21, New SM)
Answer 4
The Audit Programme to Verify Advances against Life Insurance Policies is as under-
Question 3
(i) The auditor should inspect the policies and see whether they are assigned to the bank and whether
M/s CAS & Associates have been appointed as one of the statutory central auditors of FDMH
such assignment has been registered with the insurer.
Bank., for the Financial Year 2019-20. During the course of the audit, the auditor found that the
bank has a balance with a Zurich based bank. The auditor understands that such balance is a (ii) The auditor should also examine whether premium has been paid on the policies and whether
matter of important consideration in the audit of the bank. Being head-in-charge of the assignment, they are in force.
while planning, you distributed the work among your team members and assigned Mr. Ansh for (iii) Certificate regarding surrender value obtained from the insurer should be examined.
verification of Balances in account of the bank situated in foreign country. However, Mr. Ansh,
(iv) The auditor should particularly see that if such surrender value is subject to payment of certain
being fresh to the bank audits, needs your guidance. Kindly guide. (MTP 4 Marks, May’ 20)
premium, the amount of such premium has been deducted from the surrender value.
Answer 3
Balances in Account of a Bank situated in a Foreign Country: The following procedure may be
followed while verifying balances in account of a bank situated in a foreign country - Question 5
(i) Verify the ledger balances in each account with reference to the bank confirmation certificates A nationalized bank received an application from an export company seeking sanction of a term
and reconciliation statements as at the year-end. loan to expand the existing sea food processing plant. In this connection, the General Manager,
who is in charge of Advances, approaches you to conduct a thorough investigation of this limited
(ii) Review the reconciliation statements and pay particular attention to the following.
company and submit a confidential report based on which he will decide whether to sanction
(1) Examine that no debit for charges or credit for interest is outstanding and all the items which this loan or not.
ought to have been taken to revenue for the year have been so taken. This should be particularly
Decide the points you will cover in your investigation before submitting your report to the
observed when the bills collected, etc., are credited with net amount and entries for commission,
General Manager. (MTP 5 Marks, March 18)
etc. are not made separately in the statement of account.

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Answer 5 (v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
Investigation on Behalf of the Bank for Advances: A bank is primarily interested in knowing the (vi) Equity to Long Term Loans.
purpose for which a loan is required, the sources from which it would be repaid and the security (vii) Sales to Book Debts.
that would be available to it, if the borrower fails to pay back the loan. On these considerations, the
investigating accountant, in the course of his enquiry, should attempt to collect information on the (viii) Return on Capital Employed.
under mentioned points: (c) Enter in a separate part of the statement the break-up of annual sales productwise to show their
(i) The purpose for which the loan is required and the manner in which the borrower proposes to trend. Steps involved in the verification of assets and liabilities included in the Balance Sheet of
invest the amount of the loan. the borrower company which has been furnished to the Bank- The investigating accountant should
prepare schedules of assets and liabilities of the borrower and include in the particulars stated
(ii) The schedule of repayment of loan submitted by the borrower, particularly the assumptions below:
made therein as regards amounts of profits that will be earned in cash and the amount of cash
that would be available for the repayment of loan to confirm that they are reasonable and valid in (1) Fixed assets - A full description of each item, its gross value, the rate at which depreciation has
the circumstances of the case. Institutional lenders now-a-days rely more for payment of loans been charged and the total depreciation written off. In case the rate at which depreciation has been
on the reliability of annual profits and loss on the values of assets mortgaged to them. adjusted is inadequate, the fact should be stated. In case any asset is encumbered, the amount
of the charge and its nature should be disclosed. In case an asset has been revalued recently, the
(iii) The financial standing and reputation for business integrity enjoyed by directors and officers of amount by which the value of the asset has been decreased or increased on revaluation should be
the company. stated along with the date of revaluation. If considered necessary, he may also comment on the
(iv) Whether the company is authorized by the Memorandum or the Articles of As- sociation to revaluation and its basis.
borrow money for the purpose for which the loan will be used. (2) Inventory - The value of different types of inventories held (raw materials, work-in-progress and
(v) The history of growth and development of the company and its performance during the past 5 finished goods) and the basis on which these have been valued.
years. Details as regards the nature and composition of finished goods should be disclosed. Slow-moving or
(vi) How the economic position of the company would be affected by economic, political and social obsolete items should be separately stated along with the amounts of allowances, if any, made in their
changes that are likely to take place during the period of loan. valuation. For assessing redundancy, the changes that have occurred in important items of inventory
To investigate the profitability of the business for judging the accuracy of the schedule of repayment subsequent to the date of the Balance Sheet, either due to conversion into finished goods or sale,
furnished by the borrower, as well as the value of the security in the form of assets of the business should be considered.
already possessed and those which will be created out of the loan, the investigating accountant should If any inventory has been pledged as a security for a loan the amount of loan should be disclosed.
take the under - mentioned steps: (3) Trade Receivables, including bills receivable - Their composition should be disclosed to
(a) Prepare a condensed income statement from the Statement of Profit and Loss for the previous indicate the nature of different types of debts that are outstanding for recovery; also whether the
five years, showing separately therein various items of income and expenses, the amounts of debts were being collected within the period of credit as well as the fact whether any debts are
gross and net profits earned and taxes paid annually during each of the five years. The amount of considered bad or doubtful and the provision if any, that has been made against them.
maintainable profits determined on the basis of foregoing statement should be increased by the Further, the total amount outstanding at the close of the period should be segregated as follows:
amount by which these would increase on the investment of borrowed funds.
(i) debts due in respect of which the period of credit has not expired;
(b) Compute the under-mentioned ratios separately and then include them in the statement to show
the trend as well as changes that have taken place in the financial position of the company: (ii) debts due within six months; and
(i) Sales to Average Inventories held. (iii) debts due but not recovered for over six months.
(ii) Sales to Fixed Assets. If any debts are due from directors or other officers or employees of the company, the particulars
thereof should be stated. Amounts due from subsidiary and affiliated concerns, as well as those
(iii) Equity to Fixed Assets. considered abnormal should be disclosed. The recoveries out of various debts subsequent to the date
(iv) Current Assets to Current Liabilities. of the Balance sheet should be stated.

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(4) Investments - The schedule of investments should be prepared. It should disclose the date of Answer 6
purchase, cost and the nominal and market value of each investment. If any investment is pledged The bank is a consortium member of cash credit facilities of ` 50 crores to X Ltd. Bank’s own share
as security for a loan, full particulars of the loan should be given. is ` 10 crores only. During the last two quarters against a debit of ` l.75 crores towards interest, the
(5) Secured Loans - Debentures and other loans should be included together in a separate schedule. credits in X
Against the debentures and each secured loan, the amounts outstanding for payments along with due Ltd.’s account are to the tune of ` 1.25 crores only. Sometimes, several banks form a group (the
dates of payment should be shown. In case any debentures have been issued as a collateral security, ‘consortium’) under the leadership of a ‘lead bank’ to make advance to a large customer on same
the fact should be stated. Particulars of assets pledged or those on which a charge has been created for conditions and security with proportionate rights. In such cases, each bank may classify the advance
re-payment of a liability should be disclosed. given by it according to its own experience of recovery and other factors. Since in the last two quarters,
(6) Provision of Taxation - The previous years up to which taxes have been assessed should be the amount remains outstanding and, thus, interest amount should be reversed. This is despite the
ascertained. If provision for taxes not assessed appears in be inadequate, the fact should be stated certificate of lead bank to classify that the account as performing. Accordingly, the amount should be
along with the extent of the shortfall. shown as nonperforming asset.
(7) Other Liabilities - It should be stated whether all the liabilities, actual and contingent, are
correctly disclosed. Also, an analysis according to ages of trade payables should be given to show Question 7
that the company has been meeting its obligations in time and has not been depending on trade
M/s Aadi & Co., Chartered Accountants, have been allotted the branch audit of a nationalized
credit for its working capital requirements.
bank for the year ended 31st March, 2021. You are part of audit team and have been instructed
(8) Insurance - A schedule of insurance policies giving details of risks covered, the date of payment by your partner to verify the following areas:
of last premiums and their value should be attached as an annexure to the statements of assets,
(i) Fulfilment of the criteria prescribed for NPA norms for government guaranteed advance.
together with a report as to whether or not the insurance-cover appears to be adequate, having
regard to the value of assets. (ii) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural
purposes.
(9) Contingent Liabilities - By making direct enquiries from the borrower company, from members
of its staff, perusal of the files of parties to whom any loan has been advanced those of machinery (iii) Drawing power calculation from stock statements in respect of working capital accounts.
suppliers and the legal adviser, for example, the investigating accountant should ascertain (iv) Accounts where regular/ad hoc limits are not reviewed within 180 days from the due date/
particulars of any contingent liabilities which have not been disclosed. In case, there are any, date of ad hoc sanction. What may be your areas of concern as regards matters specified
these should be included in a schedule and attached to the report. above? (MTP 6 Marks Oct 21)
(10)The impact on economic position of the company by economic, political and social changes those Answer 7
are likely to take place during the period of loan.
Area of Focus Suggested Audit Procedures
Finally, the investigating accountant should ascertain whether any application for loan to another
Government • If government guaranteed advance becomes NPA, then for the purpose
bank or any other party has been made. If so, the result thereof should be examined.
Guaranteed Advances of income recognition, interest on such advance should not to be taken
to income unless interest is realized. However, for purpose of asset
Question 6 classification, credit facility backed by Central Government Guarantee,
though overdue, can be treated as NPA only when the Central Government
Your firm has been appointed as Central Statutory Auditors of a Nationalized Bank. The Bank
repudiates its guarantee, when invoked. This exception is not applicable
follows financial year as accounting year. The bank is a consortium member of Cash Credit
for State Government Guaranteed advances, where advance is to be
Facilities of ` 50 crores to X Ltd Bank’s own share is ` 10 crores only. During the last two
considered NPA if it remains overdue for more than 90 days.
quarters against a debit of ` 1.75 crores towards interest the credits in X Ltd.’s account are to
the tune of ` 1.25 crores only. Based on the certificate of lead bank, the bank has classified the • In case the bank has not invoked the Central Government Guarantee
account of X Ltd as performing. Advise your views on the issue which were brought to your though the amount is overdue for long, the reasoning for the same should
notice by your Audit Manager. (MTP 5 Marks, March 18, RTP Nov’18, New SM) be taken and duly reported in LFAR.

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Agricultural among staff regularly checks that. You are informed that being a small branch with shortage of
• Ensure that NPA norms have been applied in accordance with the crop
Advances manpower, it is not possible to always check the work and records. Give your comments. (MTP
season determined by the State Level Bankers’ Committee in each State.
5 Marks Nov 21 & April ’23, Old & New SM, RTP May’21)
Depending upon the duration of crops – short term/ long term - raised
by an agriculturist, the NPA norms would also be made applicable to Answer 8
agricultural term loans availed of by them. Also ensure that these norms Banks are required to implement and maintain a system of internal controls for mitigating risks,
are made applicable to all direct agricultural advances listed in Master maintain good governance and to meet the regulatory requirements. Given below are examples of
Circular on lending to priority sector. internal controls that are violated in the given situation:
• In respect of agricultural loans, other than those specified in the circular, In the instant case, P who is a peon opens all the mail and forwards it to the concerned person. Further,
ensure that identification of NPAs has been done on the same basis as he does not have a signature book so as to check the signatures on important communications is not in
non- agricultural advances. accordance with implementation and maintenance of general internal control. As the mail should be
Drawing Power • Ensure that the drawing power is calculated as per the extant guidelines opened by a responsible officer. Signatures on all the letters and advices received from other branches
Calculation (i.e. the Credit Policy of the Bank) formulated by the Board of Directors of the bank or its correspondence should be checked by an officer with the signature book.
of the respective bank and agreed upon by the concerned statutory All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign currency
auditors. Special consideration should be given to proper reporting of cards etc.) should be kept in the possession of an officer, and another responsible officer should verify
sundry creditors for the purposes of calculating drawing power. the issuance and stock of such stationery. In the given case, Q has possession of all bank forms (e.g.
• The stock audit should be carried out by the bank for all accounts having cheque books, demand draft/pay order books, travelers’ cheques, foreign currency cards etc.). He
funded exposure of more than stipulated limit. The report submitted by maintains a record meticulously which were also verified on test check basis.
the stock auditors should be reviewed during the course of the audit Further, contention of bank that being a small branch with shortage of manpower they are not able to
and special focus should be given to the comments made by the stock check the work and records on regular basis, is not tenable as such lapses in internal control pose risk
auditors on valuation of security and calculation of drawing power. of fraud.
The drawing power needs to be calculated carefully in case of working The auditor should report the same in his report accordingly.
capital advances to companies engaged in construction business. The
valuation of work in progress should be ensured in consistent and proper
manner. It also needs to be ensured that mobilization advance being Question 9
received by the contractors is reduced while calculating drawing power. Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank
Limits not reviewed Accounts where regular/ad hoc limits are not reviewed within 180 days follows financial year as accounting year. Your Audit Manager informed that the bank has
from the due date/date of ad hoc sanction, should be considered as NPA. recognised on accrual basis income from dividends on securities and Units of Mutual Funds
Auditors should also ensure that the ad hoc/short reviews are not done on held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds
repetitive basis. In such cases, auditor can consider the classification of were declared after the end of financial year.
account based on other parameters and functioning of the account.
Comment. (MTP 4 Marks April 22, MTP 4 Marks Oct’18, RTP Nov’18, Old & New SM )
Answer 9
Question 8
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
You are auditing a small bank branch with staff strength of the manager, cashier and three
dividend on the shares has been declared by the corporate body in its annual general meeting and the
other staff P, Q and R. Among allocation of work for other areas, P who is a peon also opens
owner’s right to receive payment is established. This is also in accordance with AS 9. In this case the
all the mail and forwards it to the concerned person. He does not have a signature book so
dividends have been declared after the financial year end. Therefore, the re cognition of income by the
as to check the signatures on important communications. Q has possession of all bank forms
bank on accrual basis is not in order.
(e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign currency cards
etc.). He maintains a record meticulously which you have test checked also. However, no one In respect of income from government securities and bonds and debentures of corporate bodies, where
interest rates on these instruments are pre-determined, income could be booked on accrual basis,
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provided interest is serviced regularly and as such is not in arrears. It was further, however, clarified that substantial part of year. However, in the month of March, the accounts are fully utilized. On
banks may book income on accrual basis on securities of corporate bodies/public sector undertakings further scrutiny, it is observed that these account holders have made fixed deposits from these
in respect of which the payment of interest and repayment of principal have been guaranteed by the utilized amounts at the end of year. These deposits have been liquidated in first week of April
Central Government or a State Government. of next financial year. Comment upon how this situation would be dealt by you as a statutory
branch auditor? (MTP 4 Marks Oct ‘22)
Answer 11
Question 10
In the given case, many of the cash credit accounts in the branch of a nationalized bank are only
CA Ram have been doing audit of branch of RICH Bank Ltd. The principal business of the
partially utilized during substantial part of year. However, in the month of March, the accounts are
branch is lending advances to large corporates. Since last one year, many large accounts have
fully utilized. On further scrutiny, it is observed that these account holders have made fixed deposits
become Non-Performing Asset (NPA) as per guidelines. The Management of the Bank decided
from these utilized amounts at the end of year. These deposits have been liquidated in first week of
to sell one of the NPA account and consequently one NPA namely Shiva Ltd. amounting to `
April of next financial year.
11.00 Crore was sold to Asset Reconstruction Company. What audit points CA Ram should
keep in mind while doing audit of this transaction? (MTP 4 Marks Sep 22, PYP 5 Marks Jan’21) This is an example of window dressing. The branch is resorting to window dressing by artificially
boosting its advances and deposits. Utilization of advances and placing of fixed deposits at end of year
Answer 10
in branch and again liquidation of deposits early next year indicate that branch is resort ing to window
CA. Ram conducting audit of branch of RICH Bank Ltd. whose principal business is lending money dressing to inflate its advances as well as deposits artificially.
to large corporates. Many large accounts of this branch have turned NPA category and Management
The auditor has to verify whether the unavailed portion of the credit facilities (overdraft, cash credit)
sold Shiva Ltd.’s NPA account amounting to ` 11 Crore to Asset Reconstruction Company.
are used to boost the loans and deposits which might tantamount to window dressing.
CA. Ram should proceed as under:
The relevant regulatory guidelines also prohibit such type of practices and these might involve penal
In case of Sale of NPA by Bank, the auditor should examine action in terms of Banking Regulation Act, 1949.
(i) the policy laid down by the Board of Directors in this regard relating to procedures, valuation The same needs to be suitably reported in audit report and commented in LFAR also. In appropriate
and delegation of powers. cases, making a suitable qualification in the main audit report has also to be considered
(ii) only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
(iii) the assets have been sold “without recourse’ only. Question 12
(iv) subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other In course of audit of Great Samaritan Bank as at 31st March, 2022 you observed the following:
type of risk relating to the sold NPAs.
I. In a particular account there was no recovery in the past 18 months. The bank has not
(v) the NPA has been sold at cash basis only. applied the NPA norms as well as income recognition norms to this particular account.
(vi) on the sale of the NPA, the same has been removed from the books of the account. When queried the bank management replied that this account was guaranteed by the
(vii) the short fall in the net book value has been charged to the profit and loss account. central government and hence these norms were not applicable. The bank has not invoked
the guarantee. Please respond. Would your answer be different if the advance is guaranteed
(viii) where the sale is for a value higher than the NBV, no profit is recognized and the excess
by a State Government? (MTP 4 Marks March ’23, MTP 4 Marks Mar’21, MTP 4 Marks
provision has not been reversed but retained to meet the shortfall/ loss because sale of other
Apr’18, MTP 5 Marks Apr’19, RTP Nov’19, RTP May’20, New SM)
non-performing financial assets.
II. In the course of audit of Bank, you found that the Bank had sold certain of its non-performing
assets.
Question 11 Mention any two points of audit check that are very relevant to this area of checking. (MTP 2
You are part of engagement team conducting statutory audit of a branch of nationalized bank. Marks March ‘23)
During the course of audit, it has come to your notice that there are large number o f cash credit
accounts in the branch. Many of the cash credit accounts are only partially utilized during
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Answer 12 Answer 13
(i) Government Guaranteed Advance: If a government guaranteed advance becomes NPA, then Audit Procedures - In carrying out audit of advances, the auditor is primarily concerned with
for the purpose of income recognition, interest on such advance should not to be taken to income obtaining evidence about the following:
unless interest is realized. However, for purpose of asset classification, credit facility backed by
Central Government Guarantee, though overdue, can be treated as NPA only when the Central
Government repudiates its guarantee, when invoked. Evaluation of • Examine loan documentation.
Internal Controls
Since the bank has not invoked the guarantee, the question of repudiation does not arise. Hence over Advances • Examine the validity of the recorded amounts.
the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this • Examine the existence, enforceability and valuation of the security.
exemption is not available in respect of income recognition norms. Hence the income to the extent • Ensure compliance with the terms of sanction and end use of funds.
not recovered should be reversed.
• Ensure compliance with Loan Policy of Bank as well as RBI norms
The situation would be different if the advance is guaranteed by State Government because this including appropriate classification and provisioning
exception is not applicable for State Government Guaranteed advances, where advance is to be • Review the operation of the accounts.
Substantive Audit • Check that the advances represent amount due to the bank.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue Procedures
for long, the reasoning for the same should be taken and duly reported in LFAR. • Verify that the advances are disclosed, classified and described in
accordance with recognised accounting policies and practices and
(ii) In case of Sale of NPA by Bank, the auditor should examine relevant statutory and regulatory requirements.
(1) the policy laid down by the Board of Directors in this regard relating to procedures, valuation and • Check that appropriate provisions towards advances have been made
delegation of powers. as per the RBI norms, Accounting Standards and generally accepted
accounting practices.
(2) only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
• Examine all large advances while other advances may be examined on
(3) the assets have been sold “without recourse’ only.
a sample basis.
(4) subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other • Verify completeness and accuracy of interest being charged.
• Ensure that there are no unrecorded advances.
(5) the NPA has been sold at cash basis only.
• Check that the stated basis of valuation of advances is appropriate and
(6) on the sale of the NPA, the same has been removed from the books of the account. properly applied, and that the recoverability of advances is recognised
(7) the short fall in the net book value has been charged to the profit and loss account. in their valuation.
(8) where the sale is for a value higher than the NBV, no profit is recognised and the excess provision • Check whether the amounts included in the balance sheet are outstanding
as on the date of balance sheet.
has not been reversed but retained to meet the shortfall/ loss because sale of other non-performing
financial assets. • Verify completeness and accuracy of interest being charged.
Recoverability of • Review periodic statements submitted by the borrowers indicating the
Advances extent of compliance with terms and conditions.
Question 13
• Review latest financial statements of borrowers.
Advances generally constitute the major part of the assets of the bank. There are substantial
number of borrowers to whom a variety of advances are granted. The audit of advances requires • Review reports on inspection of security.
major attention from the auditors. As an expert in bank audit, you are required to briefly discuss • Review Auditors’ reports in the case of borrowers enjoying aggregate
the area of focus and suggested audit procedures regarding the evaluation of internal controls credit limits of Rupees 10 lakh or above for working capital from the
over advances, substantive audit procedures and recoverability of advances. (5 Marks Sep ‘23) banking system.
(RTP May 18)
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CA X is conducting concurrent audit of a branch of MNB Bank (a nationalized bank) in (a) ABC Chartered Accountants have been appointed as concurrent auditors for the branches
industrial hub of Pune. It is a CBS branch, and its advances are to the tune of about ` 500 of Effective Bank Ltd. for the year 2017-18. You are part of the audit team for Agra branch
crores. The branch has borrowers / customers with cash credit, term loans, and export credit of the bank and have been instructed by your senior to verify the advances of the audit
facilities, including pre - shipment and postshipment credits. Some customers in the branch are period. You are required to guide your assistant about the areas to be taken care while doing
importers who regularly get letters of credit issued to foreign suppliers. During tenure of Mr. verification during the concurrent audit. (New SM)
X as concurrent auditor, fresh credit facilities under aforesaid segments are being sanctioned (b) Write a short note on reversal of income under bank audit.(RTP May 19)
every month to new customers. The branch is also considering requests of its existing customers
Answer 15
for enhancements / fresh requirements in line with established norms.
(a) Verification of Advances as a Concurrent Auditor:
As a result of the above, the staff of the advances department in the branch is always on its toes.
The previous regular inspection of the branch (not pertaining to CA X’s tenure) had pointed (i) Ensure that loans and advances have been sanctioned properly (i.e. after due scrutiny and at the
out huge revenue leakage in advances of the branch, raising alarm bells in the Zonal Office and appropriate level).
Inspection Department. (ii) Verify whether the sanctions are in accordance with delegated authority.
Keeping in view the above situation, CA X is taking steps to ensure that there is no revenue (iii) Ensure that securities and documents have been received and properly charged/ registered.
leakage in advances of the branch and recoveries are made on the spot in case such leakages (iv) Ensure that post disbursement supervision and follow-up is proper, such as receipt of stock
are detected. Discuss any five areas in this regard where concurrent auditor’s audit procedures statements, instalments, renewal of limits, etc.
should be focused. (MTP 5 Marks Oct ‘23) (v) Verify whether there is any mis utilisation of the loans and whether there are instances indicative
Answer 14 of diversion of funds.
(vi) Check whether the letters of credit issued by the branch are within the delegated power and
The major areas to plug revenue leakage where concurrent auditor should focus audit procedures
ensure that they are for genuine trade transactions.
include: -
(vii) Check the bank guarantees issued, whether they have been properly worded and recorded in the
(i) Verifying rates of interest as per terms of sanction in sanction letter vis-à-vis those fed in CBS register of the bank. Whether they have been promptly renewed on the due dates.
as well as the calculation of interest through product rate sheets generated by CBS t o satisfy
(viii) Ensure proper follow-up of overdue bills of exchange.
that interest has been charged on all the performing accounts and interest rates charged are in
accordance with the bank’s internal regulations, directives of the RBI and agreements with the (ix) Verify whether the classification of advances has been done as per RBI guidelines.
respective borrowers. (x) Verify whether the submission of claims to DICGC and ECGC is in time.
(ii) Verification of renewal charges in respect of existing customers enjoying cash credit and export (xi) Verify that instances of exceeding delegated powers have been promptly reported to controlling/
Head Office by the branch and have been got confirmed or ratified at the required level.
credit facilities. Similarly, for fresh borrowers, proposal processing charges, including upfront
fees for term loan, needs to be verified in accordance with Bank’s circulars to ensure that all (xii) Verify the frequency and genuineness of such exercise of authority beyond the delegated powers
charges are debited at time of release of facilities to new customers. These charges also need to by the concerned officials.
be levied proportionately in respect of customers whose credit facilities have been enhanced. (b) Reversal of Income: If any advance, including bills purchased and discounted, becomes Non-
(iii) Verification of penal charges for non-submission of stock statements on due dates in case borrowers Performing Assets as at the close of any year, the entire interest accrued and credited to income
availing cash credit and export credit facilities consisting of pre-shipment credit facilities. 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.
(iv) Verification of commission /charges in case of letter of credit has been issued to importers in
accordance with the Bank’s circulars. In respect of NPAs, 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.
(v) As the branch has also granted export credit facilities in the nature of post -shipment credit
facilities, verification of commission/charges on export bills purchased is required. Further, in case of banks which have wrongly recognised income in the past should reverse the interest
if it was recognised as income during the current year or make a provision for an equivalent amount
if it was recognised as income in the previous year(s).
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Question 16 not verify the PMS transactions and advise the bank to segregate the PMS transactions from its own
While auditing FAIR Bank, you observed that a lump sum amount has been disclosed as investments and provide the certificate of external auditor as described above. In case ABN Bank does
contingent liability collectively. You are, therefore, requested by the management to guide them not provide the same the auditor may report accordingly.
about the disclosure requirement of Contingent Liabilities for Banks. (RTP Nov 19, New SM)
Contingent Liabilities for Banks: The Third Schedule to the Banking Regulation Act, 1949, requires Gupta & Co. has been appointed as a statutory auditor of TCB Bank Ltd., a private sector
the disclosure of the following as a footnote to the balance sheet- bank, registered with RBI. Mr. Kaival Gupta, the engagement partner, while performing the
(A) Contingent liabilities audit as per the checklist, noted down the following points, which would be part of the audit
queries, as tabulated below:
(i) Claims against the bank not acknowledged as debts.
(ii) Liability for partly paid investments. Sr. No. Queries
(iii) Liability on account of outstanding forward exchange contracts. Interest on State Government Guaranteed advance has been taken to income even though
1
such advance has remained overdue for more than 90 days.
(iv) Guarantees given on behalf of constituents-
There is an account for which an ad hoc limit has not been reviewed for 180 days from
(1) In India. 2 the date of such ad hoc sanction and such account has been treated as a performing asset
(2) Outside India. in the books.
(v) Acceptances, endorsements and other obligations. One of the NPAs was sold for a value higher than the net book value. Profit was not
3
recognized but the excess provision in respect of the same has been reversed.
(vi) Other items for which the bank is contingently liable.
In case of one of the accounts, an additional temporary limit has been sanctioned for 25%
(B) Bills for collection. 4
of the existing limit and for 120 days tenure.
On verification of outstanding forward exchange contracts, the ‘net position’ in respect of
5
Question 14 one of the foreign currencies was not squared and was uncovered by a substantial amount.
ABN Bank was engaged in the business of providing Portfolio Management Services to its You are required to provide the reasons due to which such queries would have been raised by
customers, for which it took prior approval from RBI. Your firm has been appointed as the Mr. Kaival and describe the actions that may be taken by the person responsible on behalf of
statutory auditors of the Bank’s financial statements for the year 2019-20. Your senior has TCB Bank Ltd. for solving such queries. . (RTP Nov ’21)
instructed you to verify the transactions of Portfolio Management Services (PMS). While Answer 15
verifying the transactions you noticed that the bank has not maintained separate record for Action that may be taken in response to
PMS transactions from the Bank’s own investments. As a statutory auditor what methodology Sr. No. Reason for such Query
the query
will be adopted by you for verification of PMS transactions? (RTP Nov 20) A State Government Guaranteed advance Interest income recognized on such advance
Answer 14 has to be treated as NPA even if it remains would be reversed and would be taken to
Separation of Investment Functions: The auditor needs to examine whether the bank, as required by the overdue for more than 90 days and in case of income only when it is realized.
1 NPA, for the purpose of income recognition,
RBI, is maintaining separate accounts for the investments made by it on their own Investment Account,
PMS clients’ account, and on behalf of other Constituents (including brokers). As per the RBI guidelines, interest on such advance should not be taken
banks are required to get their investments under PMS separately audited by external auditors. to income unless interest is realized.
Accounts for which an ad hoc limit has not It’s treatment in the books would be changed
Thus, in the instant case, ABN Bank is required to prepare separate records for PMS and as per RBI
been reviewed for 180 days from the date of from performing asset to a non-performing
guidelines PMS investments need to be audited separately by the external auditors and the auditors 2
such ad hoc sanction, should be considered asset from the date when such change in the
are required to give a certificate separately for the same. So, in the above case the auditor should
as NPA. treatment was required.
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In case of sale of NPA, where the sale is for The entry for reversal of the excess provision Answer 16
a value higher than the NBV, the auditor is would be cancelled in the books and such The borrower was enjoying overdraft credit facilities of ` 50 crore against security of stocks and debts.
required to ensure that no profit is recognized, excess provision would be retained to meet Further, though latest available stock statement for the month of February, 2022 showed inadequate
3 and the excess provision has not been reversed the shortfall/ loss that may arise because of drawing power, there was adequate drawing power available throughout the year. Stock audit report
but retained to meet the shortfall/ loss that the sale of other non-performing financial dated 31.12.2021 also reflected adequate drawing power. Hence, it shows that borrower had adequate
may arise because of the sale of other non- assets. drawing power during the year. Further, comment on declining sales is of general informative value
performing financial assets. to management for making credit decisions.
Additional temporary limit may be The terms of additional temporary limit in
The fact of over drawings in account during the month of March, 2022 and inadequate drawing power
sanctioned, for a maximum of 20% of the case of such account would be revised to
4 in a month are in nature of temporary deficiencies and do not require account to be classified as NPA
existing limit and 90 days maximum tenure. 20% of the existing limit and for 90 days
in accordance with asset classification and provisioning norms of RBI.
maximum tenure.
Net position in respect of each of the foreign The net “position” of the branch in relation RBI instructions lay down that ordinarily credit limits need to be reviewed not later than three months
5 currencies should be generally squared and to each foreign currency should be squared from the due date. As per Guidance note on Audit of Banks, in case of constraints such as non-
should not be uncovered by a substantial amount. off and get covered by a substantial amount. availability of financial statements and other data from the borrowers, the branch should furnish
evidence to show that renewal/ review of credit limits is underway and would be completed soon.
Question 16 In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an
CA Prachi was conducting statutory audit of branch of a nationalized bank for the year 2021- account where the credit limits have not been reviewed/ renewed within 180 days from the due date
22. While reviewing operations and documents/papers of a borrower enjoying overdraft credit will be treated as NPA.
facilities of ` 50 crore (availed against security of stocks and book debts), following observations It would be pertinent to note that the counting of 180 days would be required to be done from the date
were jotted down by her: - of original due date for renewal and not from the date of expiry of short reviews / technical reviews.
(i) The balance in overdraft credit facility as on 31st March,2022 was ` 55.65 crore. The balance In the instant case, the original date of renewal was 20th October, 2021 and period of 180 days has
in account exceeded sanctioned limit during the whole month of March 2022. still not expired as on balance sheet date.
(ii) As per terms of sanction letter, stock/book debt statements were required to be submitted monthly. Keeping in view all above factors, CA Prachi should accept classification of account as ‘Standard
Asset’ made by branch.
Latest available stock/book debt statement for the month of February, 2022 showed drawing
power of ` 48.50 crore only. However, stock/book debt statements of previous months showed
adequate drawing power. Question 17
(iii) Stock audit of borrower was also conducted during the year by one of empanelled stock BOT Limited is enjoying cash credit facility sanctioned from Nariman Point, Mumbai branch
auditors of the bank. Stock audit report dated 31st December,2021 placed on the record of KNB Bank for `250 crore. However, for practical considerations, various sub-limits have
showed adequate drawing power in the account. However, it has commented adversely on been fixed for the borrower company for operation at Solapur, Pune and Nashik branches of
the declining turnover of borrower in year 2021 -22(till the date of stock audit report) as the same bank.
compared to proportionate turnover in preceding year.
The manager of the Solapur branch notices that there are no credit transactions in sub - limit
(iv) The renewal of overdraft facilities was due on 20th October,2021. The account was short renewed account being operated at the Solapur branch for more than 90 days as on 31st March,2022.
by competent authority for a period of 3 months pending submission of complete papers.
Discuss the approach of CA. Muni, statutory branch auditor of Nariman Point branch, Mumbai
However, borrower has not submitted complete renewal papers till 31 st March,2022. There is of KNB Bank, in the matter of asset classification of the above borrower account. Also discuss
a request letter from borrower on record stating that valuation report of a property located at considerations for classifying said account at the Solapur branch. (RTP May ’23)
a faraway location was taking time.
Answer 17
The branch has classified the account as ‘Standard Asset’. Considering above, CA Prachi is in
Sometimes, a customer is sanctioned a cash credit limit at one branch but is authorized to utilize such
dilemma relating to proper classification of above advance. Guide her. .(RTP Nov’22)
overall limit at several other branches also, for each of which a sub-limit is fixed.

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In such a case, the determination of status of the account as NPA or otherwise should be determined in accordance with RBI guidelines. A higher net NPAs to Net advances ratio indicates the probability
at the limit-sanctioning branch with reference to the overall sanctioned limit/drawing power and not and risk of under-provisioning. Keeping in view the above, audit procedures have to be tailored
by each of the other branches where a sub-limit has been fixed. towards the examination and verification of this crucial area.
The auditor of the limit-sanctioning branch should examine whether it receives particulars of all
transactions in the account at sub-limit branches and whether status of the account has been determined
Question 19
considering the total position of operation of the account at all concerned branches. The standalone
matter of no credit transactions for more than 90 days as on 31st March,2022 at Solapur branch is CA. Sundaram is an engagement partner conducting a statutory audit of a nationalised bank. The
irrelevant. bank operates on the CBS platform, and the identification of NPAs is system based in accordance
with RBI guidelines on asset classification. He wants to be assured of satisfactory operation of
Hence, keeping in view above, CA. Muni should consider asset classification considering the total
internal control in this respect. He wants to be sure that there exists an internal control system in the
position of operation of the account at all concerned branches.
bank which not only prevents and reduces the risk of loan assets becoming non-performing at the
Regarding sub-limit at branches, the classification adopted by the limit-sanctioning branch should be initial stages but also sends out timely signals to the bank subsequently. He is putting considerable
followed. Hence, the Solapur branch has to follow asset classification made by the limit-sanctioning importance on effective credit appraisals due to their role in preventing NPA slippages.
branch.
While carrying out a walk-through of internal control over advances of banks especially in
areas of “credit appraisals” and “credit monitoring”, identify any four specific controls which
Question 18 you may be looking for. (RTP Nov ’23)
PQS & Associates are one of the joint auditors of KNO Bank for the year 2022 -23. While Answer 19
auditing KNO Bank, they are analysing industry data relating to NPAs in select public sector The following controls may be considered by auditor in areas of credit appraisals and credit monitoring
banks as part of risk assessment procedures: - for ensuring that internal control over advances is effective and the system is capable of not only
preventing and reducing the risk of NPAs at the sanction stage itself but also sending out timely
Gross NPAs (in ` Ratio of Net NPAs to
Name of Bank Net NPAs (in ` crore) signals to the bank subsequently.
crore) Net advances
(i) Use of third-party data sources in the bank for comprehensive due diligence at the sanction stage
BBI Bank 55,000 13,000 1.72%
itself to mitigate risk on account of misrepresentation and fraud.
DAB Bank 45,000 10,000 2.34%
(ii) Classification of accounts as special mentioned accounts (SMA) for early recognition of signs of
CNI Bank 55,000 18,000 2.65% incipient stress resulting in default in timely servicing of debt obligations. It can enable banks to
KNO Bank 28,000 6,500 3.97% initiate timely remedial actions to prevent potential slippages into NPAs.
BRB Bank 35,000 8,800 2.27% (iii) Institution of comprehensive, automated Early Warning Systems (EWS) in banks with EWS
In the above context, what do you understand by “Gross NPAs” and “Net NPAs” as on reporting triggers to detect stress and reduce slippage into NPAs
date in the context of financial statements of a Bank? As an auditor of KNO Bank, what inference (iv) Reporting of repayment behaviour of borrowers in their loan accounts to credit information
would you draw by comparing the “Ratio of net NPAs to net advances” with other public sector companies and inclusion of this information in the credit appraisal and decision-making process
banks?(RTP Nov ’23) for further sanctioning of loans to borrowers.
Answer 18
Gross NPAs represent opening balances of NPAs as increased by fresh NPAs during the year and Question 20
reduced by upgradations, recoveries and write-offs during the year.
In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non-
Net NPAs are arrived at after deducting amounts on account of the total provision held against NPAs/ performing assets. Draft the points of audit check that are very relevant to this area of checking.
balance in the interest suspense account to park accrued interest on NPAs and certain other adjustments. (PYP4 Marks, May ’18, New SM)
The Net NPAs to Net advances ratio is higher in the case of KNO Bank as compared to other public
sector banks. It shows that there is a risk that the bank could not have made the required provisions
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Answer 20 The auditor should consider the effect of the above factors in designing his audit approach. It is
Sale of Non-Performing Assets: In case of Sale of NPA by Bank, the auditor should examine: imperative for Branch Auditor and SCAs to have detailed knowledge of the products offered and risks
associated with them, and appropriately address them in their audit plan to the extent they give rise
• the policy laid down by the Board of Directors in this regard relating to procedures, valuation and
to the risk of material misstatements in the financial statements. In today’s environment, the banks
delegation of powers.
use different applications to carry out different transactions which may include data flow from one
• that only such NPA has been sold which has remained NPA in the books of the bank for at least 2 application to other application; the auditor while designing his plans should also understand interface
years. controls between the various applications.
• the assets have been sold/ purchased “without recourse’ only.
• subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other Question 22
In the course of statutory Branch audit of KS Bank Ltd, you observe that some borrower accounts
• the NPA has been sold at cash basis only. have been regularized before Balance sheet date by payment of overdue amount. Narrate the
• the bank has not purchased an NPA which it had originally sold. audit procedures to be carried out with special focus on the Classification of advances and
Provisioning for Non-Performing assets of the Branch. (PYP 5 Marks, Nov ‘20)
• that on the sale of the NPA, the same has been removed from the books of the account.
Answer 22
• that the short fall in the net book value has been charged to the profit and loss account.
The Audit procedures that need to be carried out with special focus on classification of advances
• that where the sale is for a value higher than the NBV, no profit is recognized and the excess
and provisioning for NPAs of KS Bank Ltd, in which the auditor has observed that some borrower
provision has not been reversed but retained to meet the shortfall/ loss because sale of other
accounts have been regularized before balance sheet date by payment of overdue amount shall be
nonperforming financial assets.
carried out as under:
(i) As per the Reserve Bank guidelines, if an account has been regularized before the balance sheet
Question 21 date by payment of overdue amount through genuine sources, the account need not be treated as
Banks, because of certain characteristics, are distinguished from other commercial enterprises NPA.
and hence it needs special audit consideration. As an auditor of a bank, specify the various (ii) Where subsequent to repayment by the borrower (which makes the account regular), the branch
peculiarities which may necessitate special audit consideration to be taken care by you. (PYP 4 has provided further funds to the borrower (including by way of subscription to its debentures or
Marks, May ’19, Old & New SM) in other accounts of the borrower), the auditor should carefully assess whether the repayment was
Answer 21 out of genuine sources or not.
Special audit considerations arise in the audit of banks because of: (iii) Where the account indicates inherent weakness based in the data available, the account shall be
deemed as a NPA.
(i) the particular nature of risks associated with the transactions undertaken;
Classification and Provision
(ii) the scale of banking operations and the resultant significant exposures which can arise within
short period of time; a. Examine whether the classification made by the branch is appropriate. Particularly, examine the
classification of advances where there are threats to recovery.
(iii) the extensive dependence on IT to process transactions;
b. Examine whether the secured and the unsecured portions of advances have been segregated
(iv) the effect of the statutory and regulatory requirements;
correctly and provisions have been calculated properly.
(v) the continuing development of new products and services and banking practices which may not
c. It is to be ensured that the classification is made as per the position as on date and hence classification
be matched by the concurrent development of accounting principles and auditing practices;
of all standard accounts be reviewed as on balance sheet date.
(vi) Evolution of technology and providing services through Net Banking and Mobiles has exposed
d. The date of NPA is significant to determine the classification and hence specific care be taken in
banks to huge operational and financial risk.
this regard.

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e. NPA should be recognized only based on concept of Past Due/ Overdue concept, and not based on (i) all off-balance sheet transactions have been accounted in the books of accounts as and when
the Balance Sheet date. such transaction has taken place;
(ii) all off balance sheet transactions have been entered into after following due procedure laid
down;
Question 23
(iii) all off balance sheet transactions are supported by the underlying documents;
You have been appointed as Concurrent auditor of one of the branches of Coin Bank Ltd. This
branch is dealing mainly in foreign exchange. State the suggested audit procedures to be covered (iv) all year end contingent liabilities have been disclosed;
by you to check the foreign exchange transactions of this branch while doing Concurrent audit. (v) the disclosed contingent liabilities do not include any crystallised liabilities which are of the
(PYP 5 Marks Dec ’21, PYP 4 Marks, Nov ’18, New SM) nature of loss/ expense and which, therefore, require creation of a provision/adjustment in the
Answer 23 financial statements;
Suggested audit procedure to be covered by the Concurrent Auditor to check the foreign (vi) the estimated amounts of financial effect of the contingent liabilities are based on the best
exchange transactions of one of the branches of Coin Bank Ltd is given hereunder: estimates in terms of Accounting Standard 29, including consideration of the possibility of any
reimbursement;
• Check foreign bills negotiated under letters of credit.
(vii) in case of guarantees issued on behalf of the bank’s directors, the bank has taken appropriate steps
• Check FCNR and other non-resident accounts whether the debits and credits are permissible under rules.
to ensure that adequate and effective arrangements have been made so that the commitments
• Check whether inward/outward remittance have been properly accounted for. would be met out of the party’s own resources and that the bank will not be called upon to
• Examine extension and cancellation of forward contracts for purchase and sale of foreign currency. grant any loan or advances to meet the liability consequent upon the invocation of the said
guarantee(s) and that no violation of section 20 of the Banking Regulation Act, 1949 has arisen
Ensure that they are duly authorized and necessary charges have been recovered.
on account of such guarantee; and
• Ensure that balances in Nostro accounts in different foreign currencies are within the limit as
(viii) such contingent liabilities which have not been disclosed on account of the fact that the possibility
prescribed by the bank.
of their outcome is remote include the management’s justification for reaching such a decision
• Ensure that the overbought/oversold position maintained in different currencies is reasonable, in respect of those contingent liabilities.
considering the foreign exchange operations.
Note: Students may be given due credit for any other relevant point quoted.
• Ensure adherence to the guidelines issued by RBI/HO of the bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/ balances.
Question 25
You have been appointed as an Auditor of LOC Bank, a nationalized bank. LOC Bank also
Question 24 deals in providing credit card facilities to its account holders. The bank is aware of the fact
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank for the financial that there should be strict control over the storage and issuance of credit cards. How will you
year 2021-22. During the course of audit your audit team observed that a lump sum amount has evaluate the internal control system in the area of credit card operations of the Bank? (PYP 5
been disclosed as Contingent Liability collectively though the components are correctly identified. Marks Nov 22, PYP 5 Marks, Nov ’19, Old & New SM, MTP 6 Marks, Oct 20, RTP May’22)
In respect of contingent liabilities, the auditor is primarily, concerned with seeking reasonable Answer 25
assurance that all the contingent liabilities are identified and properly valued and the audit firm
Credit Card Operations System of Internal Control in Banks: The auditor should evaluate the
intends to obtain a representation from the ‘management. Highlight the points/checklists that are
internal control in the area of credit card operations of LOC Bank as under:
to be covered in the management representation. (PYP 5 Marks May ’22, RTP Nov’19)
• There should be effective screening of applications with reasonably good credit assessments.
Answer 24
• There should be strict control over storage and issue of cards.
Contingent Liabilities: In respect of contingent liabilities, the auditor is primarily concerned with
seeking reasonable assurance that all contingent liabilities are identified and properly valued. The • There should be a system whereby a merchant confirms the status of unutilized limit of a credit-
auditor should obtain representation from management that: -
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card holder from the bank before accepting the settlement, in case the amount to be settled exceeds case of banks which are registered as companies under the Companies Act in terms of Section
a specified percentage of the total limit of the card holder. 143(3)(i) of the Companies Act, 2013 which is normally to be given as an Annexure to the main
• There should be a system of prompt reporting by the merchants of all settlements accepted by audit report as per the Guidance Note on Audit of Internal Financial Controls over Financial
them through credit cards. Reporting issued by the ICAI.
• Reimbursement to merchants should be made only after verification of the validity of merchant’s 2. Report on whether any serious irregularity was noticed in the working of the bank which requires
acceptance of cards. immediate attention (in accordance with sec 143(12) of the Companies Act, 2013.)
• All the reimbursement (gross of commission) should be immediately charged to the customer’s 3. As per reporting requirements cast through Rule 11 of the Companies (Audit and Auditors)
account. Rules, 2014 the auditor’s report shall also include their views and comments on the following
matters, namely:
• There should be a system to ensure that statements are sent regularly and promptly to the customer.
(a) Whether the bank has disclosed the impact, if any, of the pending litigations on its financial
• There should be a system to monitor and follow-up customers’ payments.
position in its financial statements.
• Payments overdue beyond a reasonable period should be identified and attended to carefully.
(b) Whether the bank has made provision, as required under the law or accounting standards, for
For defaulting customers, credit should be stopped by informing the merchants through periodic
material foreseeable losses, if any, on long term contracts including derivative contracts.
bulletins, as early as possible, to avoid increased losses.
(c) Whether there has been any delay in transferring amounts, required to be transferred to the
• There should be a system of periodic review of credit card holders’ accounts. On this basis, the
Investor Education and Protection Fund by the bank.
limits of customers may be revised, if necessary. The review should also include determination of
doubtful amounts and the provisioning in respect thereof. (iii) Reporting requirements relating to the Companies (Auditor’s Report) Order, 2016 are not
applicable to a banking company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949.
Question 26
M/s GH & Associates have been appointed as Central Statutory Auditors of BNB Bank,
a nationalized bank, headquartered in New Delhi for the F.Y 2020 -2021. Bank functions in
automated environment using “FLC Software”. While preparing audit report, one of the
partner highlighted that some matters covered by Companies Act, 2013 and the requirements
of Companies (Auditor’s Report), Order, 2016 reporting:
You are required to answer the following:
(i) To which authority auditors should submit their audit report?
(ii) List the matters covered under Companies Act, 2013 and
(iii) Reporting under Companies (Auditor’s Report), Order, 2016. (PYP 5 Marks July 21)
Answer 26
(i) Authority to whom Auditors to submit their Audit Report -
In the case of a nationalised bank, the auditor is required to make a report to the Central Government.
So, GH & Associates, Central Statutory Auditors of BNB Bank- a nationalized bank, would be required
to submit their report to Central Govt.
(ii) The auditor of a banking company is also required to state in the report the matters covered by
Section 143 of the Companies Act, 2013.
1. Report on adequacy and operating effectiveness of Internal Controls over Financial Reporting in
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Multiple Choice Questions (MCQs) (c) Allahabad and Rae Bareilly branch are compulsorily not required to be covered under concurrent
audit as per RBI Guidelines.
Question 1
(d) Allahabad branch has started foreign exchange business in February 2019 and as per RBI Guidelines
PFS Bank was engaged in the business of providing Portfolio Management Services to its
only the branches dealing in Foreign exchange business from more than three years are covered
customers, for which it took prior approval from RBI. Your firm has been appointed as the
under concurrent audit. Therefore, Allahabad branch is not covered under compulsory concurrent
statutory auditors of the Bank’s financial statements for the year 2018-19. Your senior has audit criteria as per RBI Guidelines but the Rae Bareilly branch is covered under compulsory
instructed you to verify the transactions of Portfolio Management Services (PMS). While concurrent audit criteria. (MTP 2 Marks, Oct 19)
verifying the transactions you noticed that the bank has not prepared separate record for PMS
Answer 2 : (b)
transactions from the Bank’s own investments. As a statutory auditor what will be your decision
for verification of PMS transactions?
(a) It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so Question 3
the auditor can verify the PMS transactions as part of investment verification for Bank’s financial The MEA Bank Ltd. has sanctioned overdraft limit of Rs.34 crore to Bharat Ltd. on the working
statements and submit the audit report accordingly. capital of the company as on 31st March 2017. As per bank norms the drawing power in the
overdraft account need to be reviewed on quarterly basis as per the audited stock statement of
(b) As per RBI guidelines PMS investments need to be audited separately by the external auditors
the company. As a central statutory auditor for the year 2018-19, while verifying the advances
and the auditors are required to give a certificate separately for the same. So, in the above case the
for the year ending 31st March 2019, you noticed that the bank has not obtained the stock
auditor should not verify the PMS transactions till the Bank segregates the transactions from its
statement of Bharat Ltd. for the two quarters ending 31st December 2018 and 31st March 2019
own investments. and no provision of NPA has been made for this account in the financial statements for the year
(c) The auditor can give a qualified opinion in his audit report on the financial statements of the Bank 2018-19. What will be your decision as a central statutory auditor?
and report the matter in special purpose certificate. (a) Classify the borrower’s account as NPA as the borrower’s financial position cannot be determined
(d) Auditor should verify that PMS funds are not utilized for lending, inter-bank deposits or deposits due to non-submission of stock statement.
to corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded (b) Instruct the bank to obtain the audited stock statement for both the quarters and review the credit
separately or not will not matter for the auditor. (MTP 1 Marks, Oct 19) limit accordingly.
Answer 1 : (b) (c) As per bank norms the drawing power need to be determined on the basis of stock statement and
it was more than three months old as on 31st March 2019, so the outstanding in the account will
be deemed as irregular.
Question 2
(d) You should give a qualificatory note in the audit report as per SA 700. (MTP 1 Marks, May’ 20 &
The Chanakya Bank Ltd. was having 150 branches all over India by the year ending 31 st March, 2019. March ’23, RTP May’19)
Ten branches of the bank were already covered for concurrent audit and the Bank’ s Audit Committee Answer 3 (c)
decided to include the below mentioned branches for concurrent audit from the year 2019 -20.
1. Allahabad branch which started foreign exchange business from February 2019.
Question 4
2. Rae Bareilly branch whose aggregate deposits were more than 35% of the aggregate deposits of the bank.
A bank has some non-interest-bearing staff advances. In the Balance Sheet these should be
Whether the decision of audit committee to include both the branches mentioned in above paragraph presented under:
for concurrent audit is as per RBI Guidelines? (a) ‘Term loans’ under ‘Advances’.
(a) The decision of audit committee is valid as according to RBI Guidelines, both the branches fulfil (b) ‘Cash Credits, Overdrafts and Loans Repayable on Demand’ under ‘Advances’.
the criteria for compulsory concurrent audit.
(c) ‘Advances in India – Others’ under ‘Advances’ Schedule.
(b) Allahabad branch falls under the compulsory audit criteria as per RBI Guidelines, however Rae
(d) ‘Others’ under ‘Other assets. (MTP 1 Marks, March’ 21)
Bareilly branch whose aggregate deposits are less than 50% of the aggregate deposits of the Bank
is not required to be compulsorily covered for concurrent audit. Answer 4 : (d).

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Question 5 (a) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
Your firm has been appointed statutory auditor by a Nationalized Bank for the year 2017-18. submitted to head office of bank directly.
Your senior advised you to check all the standard assets shown in the balance sheet as on 31 st (b) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
March 2018. While verification you observed that one of the accounts was regularised on 28th submitted to RBI directly.
March 2018, for which the interest and instalment amount was overdue from the quarter ending (c) Statutory branch audit report as well as LFAR are to be submitted to Statutory Central auditors.
30th September 2017. The account was regularized after the repayment of overdue interest and
instalment amounts was done on 26 th March 2018. Only the last day of the financial year was (d) Statutory branch audit report as well as LFAR are to be submitted to head office directly as
reckoned as the date of account becoming NPA by the Bank. As a statutory auditor will you appointment was made by Head office. (MTP 1 Mark Oct 22)
agree with the Bank’s policy? Answer 7 : (c)
(a) As the interest charged in the account was overdue for more than 90 days from the end of quarter,
it should be classified as NPA and should be considered as sub-standard asset for the balance
Question 8
sheet as on 31st March 2018.
You are the internal auditor of Fair Bank Limited for the year 2022-23 and the bank maintains
(b) As the overdue interest and instalment amount was paid before the balance sheet date there is no
all the data on computer. You are instructed by your senior to verify the loan against fixed
reason to classify the account as NPA.
deposits of the Agra branch. As per the scope of audit, you need to ensure that proper lien has
(c) The auditor should not agree with the Bank’s policy to regularise the account before balance been marked on all the fixed deposits against which loan has been issued. Which of the following
sheet date as overdue interest indicates more than normal risk attached to the business. procedure you will follow for the same:
(d) Bank can regularize the account before balance sheet date but should ensure that the amount has (a) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged
been paid through genuine resources and not by sanction of additional facilities, and the account in favour of bank and check that the lien is marked in the computer software .
remains in order subsequently. (MTP 1 Marks, April 19)
(b) Ensure that all the fixed deposit receipts are attached along with the approved loan documents.
Answer 5 (d)
(c) Discuss the process followed for lien marking with the branch manager.
(d) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged
Question 6 in favour of bank, check that the lien is marked in the computer software and the fixed deposit
While examining the computation of Demand and Time liabilities which of the following is to should be kept separately with the branch manager. (MTP 1 Mark April ’23)
be included in liabilities: Answer 8 : (a)
(a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of
recovery.
Question 9
(b) Amounts received in Indian Currency against import bills and held in sundry deposits pending
PARAS bank had an NPA account of M/s SUPARAS showing recoverable amount of ` 35 lakh
receipts of final rates.
in the books. It sold the NPA for ` 37 lakh. Please select as to which of the following options is
(c) Net credit balance in branch adjustment accounts including these relating to foreign branches. the correct accounting:
(d) Margins held and kept in sundry deposits for funded facilities. (MTP 1 Marks, April 21, Apr’22) (a) Let the amount remain in SUPARAS account.
Answer 6 : (c) (b) Credit the excess of ` 2 lakh to profit on sale of assets.
(c) Credit the excess of ` 2 lakh to Provision for loss on sale of NPAs.
Question 7 (d) Return ` 2 lakh to the party purchasing the NPA. (RTP May ’23)
Which of the following statements is correct regarding submission of Statutory branch audit Answer 9 : (c)
report and LFAR of branch signed by the branch Auditor CA. Mahaveer?

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Siddha and Associates, Chartered Accountants has been appointed as the branch statutory You are appointed as the auditor of a NBFC which is an Investment company registered with
auditor of CRR Bank. Auditor identified cases of Advances where primary security is not RBI. What shall be the special points to be covered for the audit of NBFC in case of Investment
adequate to cover the margin as stipulated by the Loan covenants. Further no documentation companies? (MTP 6 Marks, April 19, MTP 6 Marks Oct’19, RTP Nov’18, RTP Nov’19)
exists to confirm that the collateral security is unencumbered. For the advances not having OR
adequate security, the auditor should:
Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team
(a) Mention the cases in the Long Form Audit report only. members of the audit team who audited BFC have left the firm and the new team members are
(b) Not mention the cases in the Long Form Audit report. in discussion with the previous team members who are still continuing with the firm regarding
(c) Document the cases and discuss with branch management. the verification procedures to be performed. In this context, please explain what verification
procedures should be performed in relation to audit o NBFC- Investment and Credit Company
(d) Consider to downgrade the asset as per RBI prudential norms. (MTP 1 Mark Oct 21)
(NBF-CICC). (New SM)
Answer 10 : (d)
Answer 1
Some points that may be covered in the audit of NBFC - Investment and Credit Company
(NBFC-ICC):
i. Physically verify all the shares and securities held by a NBFC. Where any security is lodged
with an institution or a bank, a certificate from the bank/institution to that effect must be verified.
ii. Verify whether the NBFC has not advanced any loans against the security of its own shares.
iii. Verify that dividend income wherever declared by a company, has been duly received by an
NBFC and interest wherever due [except in case of NPAs] has been duly accounted for. NBFC
Prudential Norms directions require dividend income on shares of companies and units of
mutual funds to be recognised on cash basis. However, the NBFC has an option to account
for dividend income on accrual basis, if the same has been declared by the body corporate in
its Annual General Meeting and its right to receive the payment has been established. Income
from bonds/debentures of corporate bodies is to be accounted on accrual basis only if the
interest rate on these instruments is predetermined and interest is serviced regularly and not in
arrears.
iv. Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
v. Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
resolution or obtain a management certificate to the effect that the investments so acquired are
current investments or Long Term Investments.
vi. Check whether the investments have been valued in accordance with the NBFC Prudential
Norms Directions and adequate provision for fall in the market value of securities, wherever
applicable, have been made there against, as required by the Directions.
vii. Obtain a list of subsidiary/group companies from the management and verify the investments
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the
price paid for the acquisition of such shares.
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viii. Check whether investments in unquoted debentures/bonds have not been treated as investments Question 2
but as term loans or other credit facilities for the purposes of income recognition and asset Shreyansh & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC.
classification. The audit work has been completed. The audit team which was involved in the fieldwork came
ix. An auditor will have to ascertain whether the requirements of AS 13 “Accounting for across various observations during the course of audit of this NBFC and have also limited
Investments” or other accounting standard, as applicable, (to the extent they are not inconsistent understanding about the exceptions which are required to be reported in the audit report. They
with the Directions) have been duly complied with by the NBFC. would like to understand in detail regarding the obligations on the part of an auditor in respect
x. In respect of shares/securities held through a depository, obtain a confirmation from the of exceptions in his report so that they can conclude their work. Briefly explain. (MTP 6 Marks
depository regarding the shares/securities held by it on behalf of the NBFC. Sep 22), MTP 5 Marks Nov 21, MTP 6 Marks May 20, New SM)
xi. Verify that securities of the same type or class are received back by the lender/paid by the Answer 2
borrower at the end of the specified period together with all corporate benefits thereof (i.e. Obligation of auditor to submit an exception report to the RBI:
dividends, rights, bonus, interest or any other rights or benefit accruing thereon). (I) Where, in the case of a non-banking financial company, the statement regarding any of the items
xii. Verify charges received or paid in respect of securities lend/borrowed. referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the auditor the
xiii. Obtain confirmation from the approved intermediary regarding securities deposited with/ company has not complied with:
borrowed from it as at the year end. (a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
xiv. An auditor should examine whether each loan or advance has been properly sanctioned. He (b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
should verify the conditions attached to the sanction of each loan or advance i.e. limit on 2016; or
borrowings, nature of security, interest, terms of repayment, etc. (c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company
xv. An auditor should verify the security obtained and the agreements entered into, if any, with (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important
the concerned parties in respect of the advances given. He must ascertain the nature and value Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
of security and the net worth of the borrower/guarantor to determine the extent to which an It shall be the obligation of the auditor to make a report containing the details of such unfavorable
advance could be considered realisable. or qualified statements and/or about the non-compliance, as the case may be, in respect of the
xvi. Obtain balance confirmations from the concerned parties. company to the concerned Regional Office of the Department of Non-Banking Supervision of
the RBI under whose jurisdiction the registered office of the company is located as per first
xvii. As regards bill discounting, verify that proper records/documents have been maintained for
Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
every bill discounted/rediscounted by the NBFC. Test check some transactions with reference
Bank) Directions, 2016.
to the documents maintained and ascertain whether the discounting charges, wherever, due,
have been duly accounted for by the NBFC. (II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-
xviii. Check whether the NBFC has not lent/invested in excess of the specified limits to any single
paragraph
borrower or group of borrowers as per NBFC Prudential Norms Directions.
(1) and such report shall not contain any statement with respect to compliance of any of those
xix. An auditor should verify whether the NBFC has an adequate system of proper appraisal
provisions.
and follow up of loans and advances. In addition, he may analyse the trend of its recovery
performance to ascertain that the NBFC does not have an unduly high level of NPAs.
xx. Check the classification of loans and advances (including bills purchased and discounted) made Question 3
by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and RB & Co. are the statutory auditors of Legal Finance Ltd., an NBFC engaged in the business
the adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms of accepting public deposits and giving loans. Auditors are concerned that the format of the
Directions. financial statements should be prepared as per the notification issued by the Ministry of
(Note: The above checklist is not exhaustive. It is only illustrative. There could be various other audit Corporate Affairs dated 11th October, 2018. While auditing there was a difference of opinion
procedures which may be performed for audit of an NBFC.) between CA R and CA B regarding the disclosure of “Other Income” in the financial statements.
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CA R believes that there is no difference in the presentation requirements between Division II Super Non-Bank Limited appointed Mr Shyam as their statutory auditor for the FY 22-23. Mr
and Division III of Schedule III of the Companies Act, 2013. Is the contention of CA R correct? Shyam identified that the Net Owned Funds of the company have been less than ₹ 2 Crore since
(PYP 5 Marks May ’23, PYP 5 Marks Nov’19, MTP 6 Marks Apr’21) June 2022. Kindly guide Mr Shyam with respect to his reporting requirements as per relevant
Answer 3 NBFC provisions. (MTP 5 Marks Sep ‘23)
Though presentation requirements under Division III for NBFCs are similar to Division II (Non Answer 4
NBFC) to a large extent however there are certain following differences in the same: In exercise of the powers conferred under clause (b) of sub-section (1) of section 45–IA of the RBI
(a) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other Act and all the powers enabling it in that behalf, the Bank hereby specifies two hundred lakh rupees
expenditure’ which exceeds 1 per cent of the total income. Division II, on the other hand, requires as the Net Owned Fund (NOF) required for a non-banking financial company to commence or carry
disclosure for any item of income or expenditure which exceeds 1 per cent of the revenue from on the business of non-banking financial institution, except wherever otherwise a specific requirement
operations or ₹ 10 lakhs, whichever is higher. as to NOF is prescribed by the Bank.
(b) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity It will be incumbent upon such NBFCs, the NOF of which currently falls below ₹200 lakh, to submit a
which is not allowed to companies required to follow Division II. statutory auditor’s certificate certifying compliance with the prescribed levels by the end of the period
as given above.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited
Liability Partnership (LLP) in which its director is a partner or member. NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold
the CoR as NBFCs. Every non-banking financial company shall submit a certificate from its Statutory
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other
Auditor that it is engaged in the business of a non-banking financial institution requiring it to hold a
comprehensive income’ on the face of the Statement of profit and loss instead of showing those
Certificate of Registration under Section 45-IA of the RBI Act and is eligible to hold it. A certificate
only as part of the notes.
from the Statutory Auditor in this regard with reference to the position of the company as at end of
(e) Separate disclosure of trade receivable which have significant increase in credit risk & credit the financial year ended March 31 may be submitted to the Regional Office of the Department of
impaired. Non- Banking Supervision under whose jurisdiction the non-banking financial company is registered,
(f) The conditions or restrictions for distribution attached to statutory reserves have to be separately within one month from the date of finalization of the balance sheet and in any case not later than
disclose in the notes as stipulated by the relevant statute. December 30th of that year. The format of the Statutory Auditor’s Certificate (SAC) to be submitted
by NBFCs has been issued vide DNBS. PPD.02/66.15.001/2016 -17 Master Direction- Non-Banking
In view of the above, contention of CA R that there is no difference in the presentation requirement
Financial Company Returns (Reserve Bank) Directions, 2016.
between Division II and Division III of the Companies Act, 2013 is not correct.
Hence, in the current case, it is the responsibility of the Statutory Auditor, i.e., Mr. Shyam, to report
where NOF has fallen below ₹ 200 Lakhs.
Question 4
Super Non-Bank Limited, a “Systemically Important Non-Deposit Taking Non-Banking
Question 5
Financial Company”, was operating appropriately till the start of COVID-19 Pandemic. Due to
unforeseen conditions during the Pandemic and after that, the operating revenue of the NBFC GYAN & Co. is the statutory auditor of KUNTHU NBFC Ltd. While planning the audit
started decreasing. Following were the position of Net Owned Funds of the company during the procedures to be done during the audit of entity, there was a difference of opinion between CA.
last 4 financial years: Matigyan and his partner CA. Shrutgyan. CA. Shrutgyan is of the opinion that evaluation of
internal control system and verification of registration with RBI should not be the part of audit
Financial Year Net Owned Funds procedure, as it is the part of internal audit only. Is the contention of CA. Shrutgyan correct?
FY19-20 ₹ 15 Crore
Also state what broad areas should mandatorily become part of the audit procedure of GYAN
FY20-21 ₹ 6 Crore
& Co. for conducting the audit of KUNTHU NBFC Ltd.? (MTP 6 Marks Oct ’22 & April 22)
FY21-22 ₹ 4 Crore
FY22-23 ₹ 1.5 Crore Answer 5
Following are broad areas that should be mandatorily part of the audit procedure for conducting the
audit of NBFC:
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(1) Ascertaining the Business of the Company - The first step in carrying out the audit of a NBFC In the given situation, GYAN & Co., is the statutory auditor of KUNTHU NBFC Ltd. While planning
is to scan through the Memorandum and Articles of Association of the company, so as to acquaint the audit procedures to be done during the audit of entity, there was difference of opinion between
oneself with the type of business that the company is engaged into. Matigyan and his partner Shrutgyan regarding evaluation of internal control and verification of
The task of ascertaining the principal business activity of any NBFC is of paramount importance registration with RBI.
since the very classification of a company as a NBFC and its further classification would all As discussed above NBFCs are not entitled to commence business without first obtaining a registration
depend upon its principal business activity. Based on the classification of a company, it will be certificate from the RBI. An auditor should, therefore, verify whether the dual conditions relating to
required to comply with the provisions relating to limits on acceptance of public deposits as registration with the RBI and maintenance of minimum net owned funds have been duly complied
contained in the NBFC Public Deposit Directions. with by the concerned NBFC. Further, auditor should gain an understanding of the accounting system
(2) Evaluation of Internal Control System - An auditor should gain an understanding of the and related internal controls adopted by the NBFC to determine the nature, timing and extent of his
accounting system and related internal controls adopted by the NBFC to determine the nature, audit procedures. An auditor should also ascertain whether the internal controls put in place by the
timing and extent of his audit procedures. An auditor should also ascertain whether the internal NBFC are adequate and are being effectively followed.
controls put in place by the NBFC are adequate and are being effectively followed. Accordingly, contention of Mr. Shrutgyan regarding evaluation of internal control system and
In particular, an auditor should review the effectiveness of the system of recovery prevalent at verification of registration with RBI should not be part of the audit procedure as it is part of internal
the NBFC. He should ascertain whether the NBFC has an effective system of periodical review audits only, is not correct.
of advances in place which would facilitate effective monitoring and follow up. The absence of a
periodical review system could result in non-detection of sticky advances at their very inception
Question 6
which may ultimately result in the NBFC having an alarmingly high level of NPAs.
CA Sheetal is conducting the statutory audit of Kunthu Ltd., a non-banking financial company.
(3) Registration with the RBI - Section 45-IA of the RBI Act, 1934, has made it incumbent on the
It has branches in various parts of India. The company with a focus on housing finance, has
part of all NBFCs to comply with registration requirements and have minimum net owned funds.
outstanding nonconvertible debentures worth ₹ 170 crore. The company reportedly missed
An auditor should obtain a copy of the certificate of registration granted by the RBI or in case
interest payments of ₹ 17 crore on its debts because of inadequate liquidity. As a result, Kunthu
the certificate of registration has not been granted, a copy of the application form filed with the
Ltd. faced a series of downgrades by rating agencies on its debts over the past two months.
RBI for registration. It may particularly be noted that NBFCs incorporated af ter 9th January,
Rating was cut to D from A4 implying that the company was in default or expected to be in
1997 are not entitled to commence business without first obtaining a registration certificate from
default soon. What aspects CA Sheetal should look into in relation to the activity of mobilization
the RBI. An auditor should, therefore, verify whether the dual conditions relating to registration
of public deposits (particularly in relation to downgrading of credit facilities) by Kunthu Ltd?
with the RBI and maintenance of minimum net owned funds have been duly complied with by
(MTP 5 Marks March 22 & April ’23, PYP 5 Marks ,Nov ’20)
the concerned NBFC. The auditor should ascertain whether investment in prescribed liquid assets
have been made and whether quarterly returns as mentioned above have been regularly filed with Answer 6
the RBI by the concerned NBFC. CA Sheetal has to ascertain whether the company has complied with the following aspects in relation
(4) The auditors must ascertain whether the company properly classified as per the requirements of to the activity of mobilization of public deposits:-
various regulations. In case, the NBFC has not been classified by the RBI, the classification of i. The ceiling on quantum of public deposits has been linked to its credit rating as given by an
a company will have to be determined after a careful consideration of various factors such as approved credit rating agency. In the event of a upgrading/downgrading of credit rating, the auditor
particulars of earlier registration granted, if any, particulars furnished in the application form for should bear in mind that the NBFC will have to increase/reduce its public deposits in accordance
registration, company’s Memorandum of Association and its financial results. with the revised credit rating assigned to it within a specified time frame and should ensure that the
(5) NBFC Prudential Norms Directions - Check compliance with prudential norms encompassing NBFC has informed about the same to the RBI inwriting.
income recognition, income from investments, accounting standards, accounting for investments, ii. In the event of downgrading of credit rating below the minimum specified investment grade, a non-
asset classification, provisioning for bad and doubtful debts, capital adequacy norms, prohibition banking financial company, being an investment and credit company or a factor, shall regularise
on granting of loans by a NBFC against its own shares, prohibition on loans and investments for the excess deposit as provided hereunder:
failure to repay public deposits and norms for concentration of credit/investments.
a. with immediate effect, stop accepting fresh public deposits and renewing existing deposits;

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b. all existing deposits shall run off to maturity; and carrying on the business of acquisition of shares and securities and which satisfies the following
c. report the position within 15 working days, to the concerned Regional Office of the RBI where the conditions as on the date of the last audited balance sheet:-
NBFC is registered. (i) it holds not less than 90% of its net assets in the form of investment in equity shares, preference
d. No matured public deposit shall be renewed without the express and voluntary consent of the shares, bonds, debentures, debt or loans in group companies;
depositor. (ii) its investments in the equity shares (including instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from the date of issue) in group companies and
units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net
Question 7 assets as mentioned in clause (i) above;
In the case of companies carrying on the business of a non-banking financial institution, the Provided; that the exposure of such CICs towards InvITs shall be limited to their holdings as
auditor needs to report under CARO, 2016 whether the registration has been obtained under sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor
section 45-IA of the Reserve Bank of India Act, 1934, if required. prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as
You are required to state in brief the audit procedure to be followed while reporting under amended from time to time.
above mentioned circumstances. (RTP May 18) (iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies
Answer 7 except through block sale for the purpose of dilution or disinvestment;
Reporting under CARO, 2020 for Registration under RBI Act, 1934: As per Clause (xvi) of paragraph (iv) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the
3 of the CARO, 2020, the auditor is required to report whether the company is required to be registered Reserve Bank of India Act, 1934 except a. investment in
under section 45-IA of the Reserve Bank of India Act, 1934. If so, whether the registration has been (i) bank deposits,
obtained.
(ii) money market instruments, including money market mutual funds and liquid mutual funds
Audit Procedures and Reporting-
(iii) government securities, and
(i) The auditor should examine the transactions of the company with relation to the activities covered
(iv) bonds or debentures issued by group companies,
under the RBI Act and directions related to the Non-Banking Financial Companies.
b. granting of loans to group companies and
(ii) The financial statements should be examined to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets constitute c. Issuing guarantees on behalf of group companies.
more than 50 per cent of the gross income. As per CARO 2020, the auditor is required to report that –
(iii) Whether the company has net owned funds as required for the registration as NBFC. (i) Whether the company is a Core Investment Company (CIC) as defined in the regulations made
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons should be sought by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in
from the management and documented. case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria;
[Paragraph 3(xvi) (c)]
(ii) Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of
Question 8
CICs which are part of the Group; [Paragraph 3(xvi) (d)]
What is a Core Investment Company (CIC) under the Reserve Bank of India regulations? What
are the specific reporting requirements to be considered by an auditor in respect of CIC under
CARO 2020? (PYP 5 Marks Nov 22) Question 9
Answer 8 ABC Ltd. is a company registered under the Companies Act, 2013. The company is engaged in
the business of loans and advances, acquisition of shares / stocks / bonds / debentures/securities
Core Investment Companies: As per RBI Master Direction – Core Investment Companies (Reserve
issued by Government or local authorities. For the year ended 31st March, 2021 following are
Bank) Directions, 2016, (Reference may be made to aforesaid Master Direction), these directions
some extracts from the financial statements:
shall apply to every Core Investment Company (CIC), that is to say, a non- banking financial company
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(i) Paid-up share capital ₹ 40.53 Cr. (i) Misappropriation and criminal breach of trust.
(ii) Non-Current Assets - Loans & Advances ₹ 55.90 Cr. (ii) Fraudulent encashment through forged instruments, manipulation of books of account or through
(iii) Current Assets - Loans and advances ₹ 344.47 Cr. fictitious accounts and conversion of property.
(iv) Total assets of the company ₹ 530 Cr. (iii) Unauthorised credit facilities extended for reward or for illegal gratification.
(v) Intangible assets ₹ 3 Cr. (iv) Negligence and cash shortages.
(vi) Profit for the Year ₹ 7.25 Cr. (v) Cheating and forgery.
(vii) Income from interest and dividends ₹ 52 Cr. (vi) Irregularities in foreign exchange transactions Any other type of fraud not coming under the
specific heads as above.
(viii) Gross income ₹ 102.57 Cr.
(vii) Any other type of fraud not coming under the specific heads as above.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) under Section 45-
IA of the Reserve Bank of India (Amendment) Act, 1997. Advise. (RTP Nov’22, PYP 4 Marks Dec ‘21) Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’ referred
to in items (d) and (f) above are to be reported as fraud if the intention to cheat/ defraud is suspected/
Answer 9
proved. However, the following cases where fraudulent intention is not suspected/ proved, at the time
In order to identify a particular company as Non-Banking Financial Company (NBFC), it will consider of detection, will be treated as fraud and reported accordingly:
both assets and income pattern as evidenced from the last audited balance sheet of the company to
(I) cases of cash shortages more than ₹ 10,000/- and
decide its principal business. The company will be treated as NBFC when a company’s
(II) cases of cash shortages more than ₹ 5000/- if detected by management/ auditor/ inspecting officer
(i) Financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets) and
and not reported on the occurrence by the persons handling cash.
(ii) Income from financial assets constitute more than 50 per cent of the gross income.
A company which fulfils both these criteria shall qualify as an NBFC and would require to be registered
Question 11
as NBFC by RBI.
Differences between Division II (Ind- AS- Other than NBFCs) and Division III (Ind- AS- NBFCs)
In the given case of ABC Ltd, its Financial Assets are = ₹ 55.90 + ₹ 344.47= ₹ 400.37 Cr Total
of Schedule III. (RTP May 21)
Assets (netted off by intangible assets) = ₹ 527 Cr
Answer 11
Income from financial assets = ₹ 52 Cr
Differences between Division II (Ind- AS- Other than NBFCs) and Division III (Ind- AS- NBFCs) of
Gross Income = ₹ 102.57 Cr Schedule III: The presentation requirements under Division III for NBFCs are similar to Division II
From the above, it is clear that ABC Ltd.’s financial assets constitute more than 50 per cent of the total (Non NBFC) to a large extent except for the following:
assets (netted off by intangible assets) and income from financial assets constitutes more than 50 per (i) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity which
cent of the gross income. Hence, ABC Ltd. fulfills both these criteria to qualify as an NBFC. is not allowed to companies required to follow Division II. Additionally, NBFCs are required to
Thus ABC Ltd. can apply for registration under Section 45-IA of Reserve Bank of India (Amendment) classify items of the balance sheet into financial and non-financial whereas other companies are
Act, 1997 in prescribed form along with the necessary documents. required to classify the items into current and non-current.
(ii) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other
expenditure’ which exceeds 1 per cent of the total income. Division II, on the other hand, requires
Question 10
disclosure for any item of income or expenditure which exceeds 1 per cent of the revenue from
Classification of Frauds by NBFC (RTP May 19, RTP Nov’20) operations or ₹ 10 lakh, whichever is higher.
Answer 10 (iii) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited
Classification of Frauds by NBFC: In order to have uniformity in reporting, frauds have been Liability Partnership (LLP) in which its director is a partner or member.
classified as under based mainly on the provisions of the Indian Penal Code:
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(iv) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other Multiple Choice Questions (MCQs)
Question 1
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is :
(v) Separate disclosure of trade receivable which have significant increase in credit risk & credit
impaired. (a) Not available to depositors of NBFCs
(vi) The conditions or restrictions for distribution attached to statutory reserves have to be separately (b) Available to depositors of NBFCs
disclose in the notes as stipulated by the relevant statute. (c) Available to depositors of Banks
(d) Not available to depositors of both NBFCs and banks (MTP 1 Mark , Mar 19)
Question 12 Answer 1 : (a)
Write a short note on the following: Categorisation of NBFCs carrying out specific activity.
(RTP May ’23) Question 2
Answer 12 CER Ltd is a non-banking financial company and has been operating for the last 10 years. The
Categorisation of NBFCs carrying out specific activity: As the regulatory structure envisages scale company is duly registered as per the requirements of the Reserve Bank of India. The company’s
based as well as activity-based regulation, the following prescriptions shall apply in respect of the assets base has been very strong over the years due to its efficient management function. The
NBFCs company is also planning to get listed for which required work is going on.
(i) NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will For the financial year ended 31 March 2019, the company has closed its books of accounts and
always remain in the Base Layer of the regulatory structure. prepared the financial statements for the purpose of statutory audit in a timely manner. The
(ii) NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the auditors of the company have started their fieldwork. It has been observed by the auditors
Base layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer. that the company’s various term loans which have been given to various parties have become
overdue in terms of instalment including interest for a period of 5 months. As per the auditors
(iii) The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance
these terms loans should be considered by the company for making provision at the rate of
Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC)
20% of total outstanding amount, however, the management has considered. Please advise the
could lie in any of the layers of the regulatory structure depending on the parameters of the scale
auditors and the management regarding this matter considering that “Non-Banking Financial
based regulatory framework.
Company - Systemically Important Non-Deposit taking Company and Deposit taking Company
(iv) Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may be. (Reserve Bank) Directions, 2016” are applicable to this NBFC.
They will not be placed in the Upper Layer till further notice. (a) Provision should be made at 10%.
(b) Provision should be made 0.30%
(c) Provision should be made at 20%.
(d) Provision should be made at 0.40% (MTP 1 Marks, Oct 19)
Answer 2 : (a)
Question 3
50:50 test determination is popularly used in
(a) Banking Company
(b) Insurance Company
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(c) NBFC Company Particulars ₹ (in Lakh)

(d) Stock Trading Company (MTP 1 Marks, Oct 19, Nov’21, Oct’22, Sep’23) Standard Assets 700.00
Sub-standard Assets 200.00
Answer 3 : (c) Doubtful Assets (Secured and up-to one year) 10.00
Doubtful Assets (Secured and more than three years) 50.00
Question 4 What will be the total provision required to be made in the books of JB Finance Limited for the
year ended 31st March, 2022 for the above stated Assets?
Yuvraj Ltd. is a non-banking financial company other than Nidhi company and is covered
under “Master Direction - Non-Banking Financial Companies Auditor’s Report (Reserve Bank) (a) ₹ 49.8 Lakh
Directions, 2016”. The NBFC has been in existence for the last 11 years and its operations are (b) ₹ 47 Lakh
considerable in size having a net worth of ₹ 299 crores.
(c) ₹ 34.8 Lakh
The NBFC has new statutory auditors for the financial year ended 31 March 2019. The audit
(d) ₹ 52.8 Lakh .(RTP Nov’22)
report (including CARO) of the NBFC was clean for the financial year ended 31 March 2018.
The company had a planning discussion with the auditors of the company for the financial year Answer 5 (a)
ended 31 March 2019 who raised a point regarding the applicability of new set of accounting
standards, Indian Accounting Standards (Ind AS), on the NBFC for the financial year ended
31 March 2019 and have asked the management to ensure that its financial statements should
be according to that. This comes as a big surprise to the management who had assessed that
Ind AS would not be applicable to this NBFC because of the fact that CARO is applicable on
this NBFC. There is a big disconnect on this matter between the auditor and the management.
Please help by resolving this matter.
(a) Both the management and statutory auditors are not correct because Ind AS is not applicable
to any NBFC covered under “Master Direction - Non-Banking Financial Companies Auditor’s
Report (Reserve Bank) Directions, 2016”.
(b) Management is correct because Ind AS is only applicable to NBFC which are also a Nidhi company.
In this case, CARO being applicable Ind AS cannot apply to this NBFC.
(c) If the management does not agree with the view of statutory auditors then they should give adverse
opinion in their report and also report this to RBI.
(d) Ind AS would not be applicable for financial year ended 31 March 2019 and hence the view of
statutory auditors is not correct. (RTP Nov 19)
Answer 4 (d)
Question 5
CA Z is appointed as a Statutory Auditor of JB Finance Limited (a Non- Banking Financial
Company covered under Non-Banking Financial Company — Systematically important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016) for the
year 2021-22. Following information is available with CA Z with respect to JB Finance Limited
as at 31st March, 2022:

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Question 1
Your firm has been appointed as Central Statutory Auditors of a Nationalized Bank. The Bank Compliance • Obtain an understanding of the relevant circulars/ instructions of the RBI,
follows financial year as accounting year. Your Audit Manager informed that the bank has with CRR particularly regarding composition of items of DTL.
recognized on accrual basis income from dividends on securities and Units of Mutual Funds and SLR
held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds • Request the branch auditors to send their weekly trial balance as on Friday and
requirements
were declared after the end of financial year. comment. these are consolidated at the head office. Based on this consolidation, the DTL
position is determined for every reporting Friday. The statutory central auditor
Answer 1
should request the branch auditors to verify the correctness of the trial balances
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided relevant to the dates selected by him/her. The branch auditors should also be
dividend on the shares has been declared by the corporate body in its annual general meeting and the specifically requested to examine the cash balance at the branch on the selected
owner’s right to receive payment is established. This is also in accordance with AS 9. In this case the dates.
dividends have been declared after the financial year end. Therefore, the recognition of income by the
• Examine, on a test basis, the consolidations regarding DTL position prepared by
bank on accrual basis is not in order.
the bank with reference to the related returns received from branches.
In respect of income from government securities and bonds and debentures of corporate bodies, where
The auditor should examine whether the valuation of securities done by the bank
interest rates on these instruments are pre-determined, income could be booked on accrual basis,
is in accordance with the guidelines prescribed by the RBI.
provided interest is serviced regularly and as such is not in arrears. It was further, however, clarified that
• While examining the computation of DTL, specifically examine that items have
banks may book income on accrual basis on securities of corporate bodies/public sector undertakings
been excluded from liabilities as per RBI guidelines. Some of these items are:-
in respect of which the payment of interest and repayment of principal have been guaranteed by the
central government or a State government. • Paid up capital, reserve, any credit balance in profit & loss account of bank,
amount of loan taken from RBI and amount of refinance taken from EXIM
bank, NHB, SIDBI and NABARD
Question 2
• Part amounts of recoveries from the borrowers in respect of debts considered
As statutory central auditors of a Nationalized bank, what special points are to be borne in bad and doubtful of recovery.
mind in the audit of compliance with “Statutory Liquidity Ratio” (SLR) requirements?
• Amounts received in Indian currency against import bills and held in sundry
Answer 2 deposits pending receipts of final rates.
(i) Statutory Liquidity Ratio (SLR) Requirement–s SLR is the requirement that every scheduled
Question 3
commercial bank in India is required to maintain in the form of certain liquid assets such as gold, cash
and government approved securities before providing credit to the customers. The Reserve Bank of Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India
India requires statutory central auditors of banks to verify the compliance with SLR requirements of guidelines.
12 odd dates in different months of a fiscal year not being Fridays. The objective of maintaining SLR Answer 3
is to have an amount in the form of liquid assets which can be used to handle a sudden increase in
The detailed scope of the concurrent audit should be clearly and uniformly determined for the Bank
demand for the amount from the depositors. The resultant report is to be sent to the top management
as a whole by the Bank’s Central Inspection and Audit Department in consultation with the Bank’s
of the bank and to the Reserve Bank.
Audit Committee of the Board of Directors (ACB). In determining the scope, importance should be
given to checking high-risk transactions having large financial implications as opposed to transactions
involving lesser amounts. The detailed scope of the concurrent audit may be determined and approved
by the ACB.
Further, the guidelines issued by the RBI cover all the key areas of activities of the branch which is
under concurrent audit. Most banks have prepared an Audit Manual for this purpose. Broadly stated,
the following areas are covered by these guidelines:

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Scope of Concurrent Audit in Foreign (ii) The auditor should also examine whether premium has been paid on the policies and whether
House Keeping they are in force.
Banks Exchang
(iii) Certificate regarding surrender value obtained from the insurer should be examined.
Cash Investments (iv) The auditor should particularly see that if such surrender value is subject to payment of certain
Other Items
premium, the amount of such premium has been deducted from the surrender value.
Deposits Advances
Question 5
Question 4 Your firm has been appointed as Central Statutory Auditors of a Nationalized Bank is a
In course of audit of Good Samaritan Bank as at 31st March,23 you observed the following. consortium member of Cash Credit Facilities of 50 crores to X Ltd. Bank’s own share is ₹ 10
crores only. During the last two quarters against a debit of ₹1.75 crores towards interest the
a) In a particular account there was no recovery in the past 18 months. The bank has not
credits in X Ltd’s account are to the tune of 1.25 crores only. Based on the certificate of lead
applied the NPA norms as well as income recognition norms to this particular account.
bank, the bank has classified the account of X Ltd as performing. The Bank follows financial
When queried the bank management replied that this account was guaranteed by the central
year as accounting year. vise your views on the issue which were brought to your notice by your
government and hence these norms were not applicable. The bank has not invoked the
Audit Manager.
guarantee. Please respond. Would your answer be different if the advance is guaranteed by
a State Government? Answer 5
b) The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. The bank is a consortium member of cash credit facilities of ₹ 50 crores to X Ltd. Bank’s own share
Write suitable audit program to verify these advances. is ₹ 10 crores only. During the last two quarters against a debit of ₹ 1.75 crores towards interest, the
credits in X Ltd.’s account are to the tune of ₹ 1.25 crores only. Sometimes, several banks form a
Answer 4
group (the ‘consortium’) under the leadership of a ‘lead bank’ to make advance to a large customer
a) Government Guaranteed Advance: - A government guaranteed advance becomes NPA, then for on same conditions and security with proportionate rights. In such cases, each bank may classify the
the purpose of income recognition, interest on such advance should not to be taken to income unless advance given by it according to its own experience of recovery and other factors. Since in the last
interest is realized. two quarters, the amount remains outstanding and, thus, interest amount should be reversed. This is
However, for purpose of asset classification, credit facility backed by Central Government Guarantee, despite the certificate of lead bank to classify that the account as performing. Accordingly, the amount
though overdue, can be treated as NPA only when the Central Government repudiates its guarantee, should be shown as non-performing asset.
when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not arise. Hence Question 6
the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this
You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also
exemption is not available in respect of income recognition norms. Hence the income to the extent not
deals in providing credit card facilities to its account holder. The bank is aware of the fact that
recovered should be reversed.
there should be strict control over storage and issue of credit cards. How will you evaluate the
The situation would be different if the advance is guaranteed by State Government because this Internal Control System in the area of Credit Card operations of a Bank?
exception is not applicable for State Government Guaranteed advances, where advance is to be
Answer 6
• There should be effective screening of applications with reasonably good credit assessments.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue for
long, the reasoning for the same should be taken and duly reported in LFAR. • There should be strict control over storage and issue of cards.
b) The Audit Programme to Verify Advances against Life Insurance Policies is as under- • There should be a system whereby a merchant confirms the status of unutilised limit of a credit-
card holder from the bank before accepting the settlement, in case the amount to be settled exceeds
(i) The auditor should inspect the policies and see whether they are assigned to the bank and whether
a specified percentage of the total limit of the card holder.
such assignment has been registered with the insurer.
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• There should be a system of prompt reporting by the merchants of all settlements accepted by them (A) Contingent liabilities
through credit cards. (i) Claims against the bank not acknowledged as debts.
• Reimbursement to merchants should be made only after verification of the validity of merchant’s (ii) Liability for partly paid investments.
acceptance of cards.
(iii) Liability on account of outstanding forward exchange contracts.
• All the reimbursement (gross of commission) should be immediately charged to the customer’s
(iv) Guarantees given on behalf of constituents-
account.
(1) In India.
• There should be a system to ensure that statements are sent regularly and promptly to the customer.
(2) Outside India.
(v) Acceptances, endorsements and other obligations.
Question 7
(vi) Other items for which the bank is contingently liable.
You have been appointed as Concurrent Auditor of a nationalized bank branch. The main
business at the branch is dealing in foreign exchange. Suggest the main areas of coverage with (B) Bills for collection.
regard to foreign exchange transactions of the said branch under concurrent audit.
Answer 7 Question 9
• Check foreign bills negotiated under letters of credit. ABC Chartered Accountants have been appointed as concurrent auditors for the branches of
• Check FCNR and other non-resident accounts whether the debits and credits are permissible under Effective Bank Ltd. for the year 2202-23. You are part of the audit team for Agra branch of the
rules. bank and have been instructed by your senior to verify the advances of the audit period. You
are required to guide your assistant about the areas to be taken care while doing verification
• Check whether inward/outward remittance have been properly accounted for.
during the concurrent audit.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign currency.
Answer 9
Ensure that they are duly authorized and necessary charges have been recovered.
(a) Verification of Advances as a Concurrent Auditor:
• Ensure that balances in Nostro accounts in different foreign currencies are within the limit as
(i) Ensure that loans and advances have been sanctioned properly (i.e. after due scrutiny and at the
prescribed by the bank.
appropriate level).
• Ensure that the overbought/oversold position maintained in different currencies is reasonable,
(ii) Verify whether the sanctions are in accordance with delegated authority.
considering the foreign exchange operations.
(iii) Ensure that securities and documents have been received and properly charged/ registered.
• Ensure adherence to the guidelines issued by RBI/HO of the bank about dealing room operations.
(iv) Ensure that post disbursement supervision and follow-up is proper, such as receipt of stock
• Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.
statements, instalments, renewal of limits, etc.
(v) Verify whether there is any mis utilisation of the loans and whether there are instances indicative
Question 8 of diversion of funds.
While auditing FAIR Bank, you observed that a lump sum amount has been disclosed as (vi) Check whether the letters of credit issued by the branch are within the delegated power and
contingent liability collectively. You are, therefore, requested by the management to guide them ensure that they are for genuine trade transactions.
about the disclosure requirement of Contingent Liabilities for Banks. Kindly guide.
(vii) Check the bank guarantees issued, whether they have been properly worded and recorded in the
Answer 8 register of the bank. Whether they have been promptly renewed on the due dates.
(b) Contingent Liabilities for Banks: The Third Schedule to the Banking Regulation Act, 1949, (viii) Ensure proper follow-up of overdue bills of exchange.
requires the disclosure of the following as a footnote to the balance sheet-
(ix) Verify whether the classification of advances has been done as per RBI guidelines.

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(x) Verify whether the submission of claims to DICGC and ECGC is in time. Question 11
(xi) Verify that instances of exceeding delegated powers have been promptly reported to controlling/ Banks, because of certain characteristics, are distinguished from other commercial enterprises
Head Office by the branch and have been got confirmed or ratified at the required level. and hence it needs special audit consideration. As an auditor of a bank, specify the various
(xii) Verify the frequency and genuineness of such exercise of authority beyond the delegated powers peculiarities which may necessitate special audit consideration to be taken care by you?
by the concerned officials. Answer 11
Special audit considerations arise in the audit of banks because of:
Question 10 • the particular nature of risks associated with the transactions undertaken;
In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non- • the scale of banking operations and the resultant significant exposures which can arise within short
performing assets. Draft the points of audit check that are very relevant to this area of checking. period of time;
Answer 10 • the extensive dependence on IT to process transactions;
In case of Sale/Purchase of NPA by Bank, the auditor sho examine: • the effect of the statutory and regulatory requirements;
• the policy laid down by the Board of Directors in this regard relating to procedures, valuation and • the continuing development of new products and services and banking practices which may not be
delegation of powers including non performing financial assets that may be purchased/sold, norms matched by the concurrent development of accounting principles and auditing practices.
or such purchase/sale, valuation procedure and accounting policy.
Evolution of technology and providing services through Net Banking and Mobiles has exposed banks
• only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years. to huge operational and financial risk.
• the assets have been sold/ purchased “without recourse’ only i.e the entire credit risk associated
The auditor should consider the effect of the above factors in designing his audit approach. It is
with the non-performing asset should be transferred to the purchasing bank.
imperative for Branch Auditors and SCAs (Statutory Central Auditors) to have detailed knowledge of
• subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other the products offered and risks associated with them, and appropriately address them in their audit plan
to the extent they give rise to the risk of material misstatements in the financial statements.
• the NPA has been sold at cash basis only. Under no circumstances, NPA can be sold to another bank
at a contingent price .The entire sale consideration has to be received on upfront basis. In today’s environment, the banks use different applications to carry out different transactions which
may include data flow from one application to other application; the auditor while designing his plans
• the bank has not purchased an NPA which it had originally sold.
should also understand interface controls between the various applications.
In case of sale of an NPA, the auditor should also ensure that:
• on the sale of the NPA, the same has been removed from the books of the account of selling bank
on transfer; Question 12
• If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the ABC Bank had sanctioned credit limits of₹ 100 lakh to M/s Volkart Ltd on 1st September 2021.
shortfall should be debited to the profit and loss account of that year. The renewal of limits was due ons1t September 2022. While doing the statutory branch audit
• If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will be for the year ended 31st March 2023, you find that the renewal has not been done even though180
utilised to meet the shortfall/ loss on account of sale of other non-performing financial assets. days are over. The bank says that the renewal process has been initiated on time and most of the
• Similarly, in case of purchase of NPAs, the auditor should ver that: document are received. The account is operated regularly and is in order; balance is maintained
within drawing power. It also shows a letter from Volkat stating that due to a sudden death
• the NPA purchased has been subjected to the provisioning requirements appropriate to the
classification status in the books of the purchasing bank. of their auditor, a new auditor had to be appointed. Procedure for appointment took some
time and the new auditor was doing the audit all over again. The limit was not renewed till
• any recovery in respect of an NPA purchased from other banks is first adjusted against its acquisition
cost and only the recovered amount in excess of the acquisition cost has been recognised as profit. 31/3/202.3However, the audited financials are received on 10th April 2023 and the renewal letter
was issued immediately. Your assistant is insisting that the account must be classified as NPA
• for the purpose of capital adequacy, banks have assigned 100% risk weights to the NPAs purchased
since the limit was not renewed as on 31/3/2023. what is your opinion?
from other banks.

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As per Guidelines of Reserve Bank of India the account should be classified as NPA if renewal is not CA. Harshit is conducting statutory audit of branch of a public sector bank. On examining 20
done in 180 days. However, in the present case, operations in the account are excellent. The bank large advances of the branch, he finds that in 5 examined cases, loan applications have been
has shown a letter from that company that due to certain reasons the audited financial statements are filled up scantily with important details left out. In these cases, it is also noticed that cash credit
delayed. Further, the limit has been renewed before signing the audit report. limits to the borrowers were enhanced during the year but there are no records pertaining to
Thus, even if the sanction was issued after the balance sheet date, it relates to the position as on the assessment of enhanced working capital requirements in respective borrower files. The branch
balance sheet date. Therefore, it is an adjusting event under AS 4, Contingencies and Events Occurring is unable to show such assessments/workings in system either.
After the Balance Sheet Date. It is also a matter of substance over form. However, all the five accounts are operating satisfactorily. These accounts have been classified
The auditor would consider classifying the account as a standard asset. as standard assets by branch. Would above information prompt auditor to suggest change in
asset classification of above accounts? What does depicted situation reflect?
Answer 14
Question 13
An account becomes NPA when it ceases to generate income for bank. In the given situation, all the
You are auditing a small bank branch with staff strength of the manager, cashier and three examined five accounts are operating satisfactorily. There is no reason for suggesting changes in their
other staff S1,S2 and S3. Among allocation of work for other areas, S1 who is a also opens all classification.
the mail and forwards it to the concerned person. He does not have a signature book so as
The matter of scantily filling up loan applications and lack for record for assessment of enhanced
to check the signatures on important communications. S2 has possession of all bank forms
working capital requirements shows that internal control over advances in branch is not proper. The
(e.g. Cheque books, demand draft/pay order books, travelers’ cheque, foreign currency cards
above said situation shows deficiencies in “credit appraisal” at branch level. Such deficiencies need to
etc.) He maintains a record meticulously which you have test checked also. However, no one
be highlighted by auditor in LFAR.
among staff regularly checks that. You are informed that being a small branch with shortage of
manpower, it is not possible to always check the work and records. Give your comments.
Banks are required to implement and maintain a system of internal controls for mitigating risks, You are conducting concurrent audit of branch of a public sector bank. It is a large branch having
maintain good governance and to meet the regulatory requirements. Given below are examples of advances of about ₹ 500 crores including export advances of ₹ 300 crores. Some borrowers also
internal controls that are violated in the given situation: get LCs issued from branch for importing raw diamonds from diamond hubs of Belgium. You
In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned person. want to be sure that there is no revenue leakage in branch. For the time being, you are focusing
Further, he does not have a signature book so as to check the signatures on important communications upon advances. Discuss any five areas pertaining to advances of the branch which you would
is not in accordance with implementation and maintenance of general internal control. As the mail verify to ensure no revenue leakage.
should be opened by a responsible officer. Signatures on all the letters and advices received from other Answer 15
branches of the bank or its correspondence should be checked by an officer with the signature book. (i) Interest rates fed in the system need to be verified with respect to corresponding sanction letters.
All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheque, foreign currency It would help ensure that correct rate of interest is fed into the system and interest is applied
cards etc.) should be kept in the possession of an officer, and another responsible officer should verify properly at stipulated intervals on advances.
the issuance and stock of such stationery. In the given case, S2 has possession of all bank forms (ii) Processing fees in respect of freshly sanctioned advances and renewed limits need to be levied in
(e.g. cheque books, demand draft/pay order books, travelers’ cheque, foreign currency cards etc.). He accordance with bank guidelines and these need to be verified. Any revision in processing fees
maintains a record meticulously which were also verified on test check basis. from time to time has to be given effect to in accordance with circulars/manual of bank.
Further, contention of bank that being a small branch with shortage of manpower they are not able to (iii) Sanction of cash credit limits is generally accompanied with stipulation to submit stock statements.
check the work and records on regular basis, is not tenable as such lapses in internal control pose risk Non submission of stock statements can involve levying of penal interest. Verification of this
of fraud. aspect is required.
The auditor should report the same in his report accordingly.
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(iv) Verification of overdue interest on export bills purchased and packing credit facilities for overdue Of late, the top management of the bank has been pushing for aggressive targets in opening of
period. CASA deposits. He wants to ensure that CASA deposit accounts opened by the branch during
(v) Verification of charges/commission in respect of letters of credit issued in accordance with Bank’s his term comply with KYC norms.
circulars/manual. During the course of concurrent audit of a particular month, he finds that temporary over
limits are granted to few borrowers availing cash credit facilities up to 10% of their respective
sanctioned limits. Granting of such over limits falls within the powers of Chief Manager of the
Question 16 said branch. It is also noticed by him that temporary overdrafts are allowed to few customers
CA. Seema is appointed as stock auditor of Bhawani Rice Mills Pvt. Ltd. availing credit facilities in their current accounts. However, granting of these temporary overdrafts also falls in Chief
from R.K. Manager’s delegated powers. Temporary over limits and overdrafts as discussed above have
been adjusted and paid before the end of the month.
Puram Branch, Near Tamil Educational Society, New Delhi.
It is further noticed by him during the same month that branch has sanctioned 5 fresh advances
The borrower is enjoying cash credit limit of ₹ 12 crore from branch against security of paid
falling within Chief Manager’s powers and conforming to bank norms aggregating to ` 10 crore.
stocks and debtors up to 90 days against margin of 25%. She proceeds to visit premises of
All these sanctioned advances pertain to same industry i.e., jute mills manufacturing jute sacks.
Bhawani Rice Mills Pvt. Ltd. located on outskirts of Delhi. She verifies books of accounts and
He feels that branch’s approach is not proper and sanction of 5 advances to the same industry
stock records of the company and also test checks quantity of paddy and rice of 20000 quintals
lacks diversity and lending decision of branch is not proper.
and 8000 bags lying in premises of the company.
He further notices that during the month, one borrower of branch falling under definition of
Drawing power of ₹ 12.05 crore is computed in stock audit report and report stands submitted
“small enterprise” in MSME sector has shifted its credit facilities from the branch to a bank
to bank. After about a week, regular internal inspector appointed by Inspection department of
in private sector. The branch has levied foreclosure charges on outstanding credit facilities
bank also happened to visit premises of the borrower and found that rice contained in about 5000
pertaining to borrower by disregarding “Code of Bank’s Commitment to Micro and Small
bags included in stocks having approx. value of ₹ 1.50 crore was fungus ridden. The company
Enterprises. The borrower is still having current account with branch. Reversal of such charges
was holding this stock for last 15 months.
would lead to revenue loss for branch. He is in a fix as far as reporting is concerned.
How do you view the above situation? Discuss
Answer 16
1. As regards dormant deposit accounts in the branch, which of the following is not part of duty
The above situation reflects that professional work of stock audit was not performed diligently by of concurrent auditor?
stock auditor. It is one of the important responsibilities of stock auditor to verify condition of stocks.
a) Verifying that dormant accounts are revived with appropriate authority
The auditor’s role is not limited to verify physical quantities only.
b) Examining authorization for withdrawals
In given case, she should have got opened rice bags on test check basis. In the process, she could have
come to know about fungus ridden condition of rice. Value of such rice should have been excluded c) Following up with account holders to ensure status of accounts remains active
while arriving at value of stocks for purpose of computation of drawing power. It shows that she has d) Verifying that dormant accounts at the branches ageing more than 10 years have been transferred
failed to perform her work diligently and drawing power calculated in the report submitted to bank is to Deposit Education and Awareness Fund (DEAF)
not proper.
Ans: (c)
Integrated Case Scenario

2. The concurrent auditor wants to ensure that fresh CASA accounts opened in the branch are
CA. Madhusudan is conducting concurrent audit of a branch of a nationalized bank. It is a large KYC compliant. Which of the following best sums up scope of KYC guidelines prescribed by RBI?
branch having deposits of ` 350 crore and advances of ` 600 crore respectively. The deposits of
a) The basic purpose of such guidelines is to weed out duplicate customers at the same branch.
branch consist of term deposits apart from CASA deposits. It is an old branch in operation since
late 70s. Therefore, there are many dormant deposit savings, current and term deposit accounts b) Such guidelines contain detailed requirements for banks to enable them to draw a 360- degree
at the branch. credit profile of the customers by monitoring of transactions. Its primary purpose is assisting
banks in making prudent credit decisions.
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c) Such guidelines have a basic objective of ensuring credit of Direct benefit transfers (DBT) in c) The matter should be reported only for its disregard of Code without highlighting revenue impact.
accounts of deserving account holders. d) The matter concerns branch management’s decision. It does not fall in purview of concurrent audit.
d) Such guidelines contain detailed requirements in respect of customer acceptance policy, customer Ans: (a)
identification procedures, monitoring of transactions and risk management.
Question 1
Ans: (d)
Define NBFC. Also give a brief description about types of NBFCs covering any five NBFCs.
Answer 1
3. Which of the following statements is most appropriate as regards reporting of matters relating
to temporary over limits in cash credit accounts and temporary overdrafts in current accounts? Definition of NBFC:45 I(f) of Reserve Bank of India (Amendment) Act, 1997 define non-banking
financial company as:
a) The said instances cannot be reported as these fall in powers of Chief Manager.
(i) A financial institution which is a company;
b) The said instances can be reported in monthly concurrent audit report. No discussion is necessary
with Chief Manager in this respect to ensure sanctity of report. (ii) A non-banking institution which is a company and which has as its principal business the receiving
of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
c) The said instances can be reported in monthly concurrent audit report. However, a discussion is
necessary with Chief Manager in this respect. (iii) Such other non-banking institution or class of such institutions, as the Bank may, with the previous
approval of the Central Government and by notification in the Official Gazette, specify;” NBFCs
d) The said instances cannot be reported as these fall in powers of Chief Manager and have been
mandated to register under RBI NBFCs registered with RBI are categordizaes follows:
adjusted and paid before the end of the month
(a) in terms deposit acceptance or otherwise into Deposit and Non-Deposit accepting NBFCs;
Ans: (c)
(b) non deposit taking NBFCs by their size into systemically important and non-systemically
important (NBFC-NDSI and NBFC-ND); and
4. Which of the following statements is most appropriate regarding sanction of fresh advances
(c) by the kind of activities, they conduct.
to borrowers in the same industry in a month from concurrent auditor’s perspective?
Within the categorization mentioned in (c) above, (i.e. by the kind of activity they conduct) the
a) Such a lending lacks diversity and needs to be reported without fail.
different types of NBFCs are as follows:
b) Such a lending increases credit risk for branch and needs immediate attention of higher authorities
Asset
of bank. Finance
Company,
c) Lending has been made within Chief Manager’s powers. It does not fall in concurrent auditor’s Investment Infrastructure Systematically
Infrastructure
Debt Fund-
Non-Banking
Financial
Non-Banking
Financial
NBFC - Non-
Operative
Investment
Finance Important core Company,
domain to question wisdom of lending decision conforming to bank norms. and Credit
Company Company Investment
Non-Banking Company - Company Financial
Loan
Financial Micro Finance - Factors Holding
Company Company.
Company Institution (NBFC - Company
d) Although lending has been made within Chief Manager’s powers, branch should have reported to (ICC) (IFC) (CIC-ND-SI)
(IDF-NBFC) (NBFC-MFI) Factors) (NOFHC)
Mortgage
Guarantee
higher authorities flagging sanction of fresh advances to same industry. Only this aspect should be Companies
etc.
reported in concurrent auditor’s report.
Ans: (c) Types of NBFCs
All NBFCs are either deposit taking or non-deposit taking. If they are non-deposit taking, ND is
5. As regards matter of levying of foreclosure charges described in case scenario, what is suffixed to their name (NBFC-ND).
appropriate course of action for concurrent auditor? Companies exempted from registration under RBI
a) The matter should be reported even though it would lead to revenue loss for branch. Companies that do financial business but are regulated by other regulators are given specific exemption
by the Reserve Bank from its regulatory requirements for avoiding duality of regulation. Following
b) The matter should not be reported as it is part of duties of concurrent auditor to safeguard branch’s
NBFCs have been exempted from the requirement of registration under Section 45-IA of the RBI Act,
revenue interests.
1934 subject to certain conditions.
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Question 2 Answer 3
Shubham & Associates are going to start the audit of NBFCs. They have not performed much In order to identify a particular company as Non-Banking Financial Company (NBFC), it will consider
work for the NBFCs in the past years. You are required to explain the requirements related to both assets and income pattern as evidenced from the last audited balance sheet of the company to
registration and regulation of NBFCs which an auditor needs to keep his in mind while planning decide its principal business. The company will be treated as NBFC when a company’s financial
the audit of NBFC which would help this firm. assets constitute more than 50 per cent of the total assets (netted off by intangible assets) and income
Answer 2 from financial assets constitute more than 50 per cent of the gross income. A company which fulfils
both these criteria shall qualify as an NBFC and would require to be registered as NBFC by Reserve
An auditor should know following points regarding registration and regulation of NBFCs: Under
Bank of India.
Section 45–IA of the RBI Act, 1934, no NBFC shall commence or carry on the business of a non-
banking financial institution without In the given case, though Satyam Pvt Ltd is fulfilling the criteria on the asset side, but however is not
fulfilling the criteria on the income side, the company cannot be classified as a deemed NBFC.
• obtaining a certificate of registration issued by the RBI; and
• having a net owned fund (NOF) of ₹ 25 lakhs (₹ Two crore since April 1999) not exceeding two
hundred lakhs rupees, as the RBI may, by notification in the Official Gazette, specify. Question 4
(The RBI (Amendment) Act (1997) provided an entry point norm of ₹ 25 lakh as the minimum NOF Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team
which was revised upwards to ` 2 crore for new NBFCs seeking grant of certificate of registration members of the audit team who audited BFC have left the firm and the new team members are
(CoR) on or after 21 April 1999). in discussion with the previous team members who are still continuing with the firm regarding
the verification procedures to be performed. In this context, please explain what verification
A company incorporated under the Companies Act and desirous of commencing business of non-
procedures should be performed in relation to audit o NBFC- Investment and Credit Company
banking financial institution as defined under Section 45–IA of the RBI Act, 1934 can apply to the
(NBF-CICC).
RBI in prescribed form along with necessary documents for registration. The RBI issues CoR after
satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. Answer 4
However, to obviate dual regulation, certain categories of NBFCs which are regulated by other i. Physically verify all the shares and securities held by a NBFC. Where any security is lodged
regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/ with an institution or a bank, a certificate from the bank/institution to that effect must be verified.
Merchant Banking companies/Stock Broking Companies registered with SEBI, Insurance Company ii. Verify whether the NBFC has not advanced any loans against the security of its own shares.
holding a valid CoR issued by IRDA, Nidhi Companies as notified under Section 406 of the Companies
iii. Verify that dividend income wherever declared by a company, has been duly received by an
Act, 2013, Chit Companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or
NBFC and interest wherever due [except in case of NPAs] has been duly accounted for. NBFC
Housing Finance Companies regulated by National Housing Bank.
Prudential Norms require dividend income on shares of companies and units of mutual funds to
The RBI has issued directions to NBFCs on acceptance of public deposits, prudential norms like be recognised on cash basis.
capital adequacy, income recognition, asset classification, provision for bad and doubtful debts, risk
However, the NBFC has an option to account for dividend income on accrual basis, if the same
exposure norms and other measures to monitor the financial solvency and reporting by NBFCs.
has been declared by the body corporate in its Annual General Meeting and its right to receive
Directions were also issued to auditors to report non-compliance with the RBI Act and regulations to the payment has been established. Income from bonds/debentures of corporate bodies is to be
the Reserve Bank, Board of Directors and shareholders. accounted on accrual basis only if the interest rate on these instruments is predetermined and
interest is serviced regularly and not in arrears.
Question 3 iv. Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
Satyam Pvt Ltd is a company engaged in trading activities, it also has made investments in
shares of other Companies and advanced loans to group companies amounting to more than v. Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
50% of its total assets. resolution or obtain a management certificate to the effect that the investments so acquired are
current investments or Long-Term Investments.
However, trading income constitutes majority of its total income. Whether the Company is an NBFC?
vi. Check whether the investments have been valued in accordance with the NBFC Prudential
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Norms and adequate provision for fall in the market value of securities, wherever applicable, xx. Check the classification of loans and advances (including bills purchased and discounted) made
have been made there against, as required by the Directions. by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and
vii. Obtain a list of subsidiary/group companies from the management and verify the investments the adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms.
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the
price paid for the acquisition of such shares and whether the Valuation is as per Prudential
Question 5
norms.
You are appointed as the auditor of a NBFC registered with the RBI and which is accepting
viii. Check whether investments in unquoted debentures/bonds have not been treated as investments
and holding public deposits. You are considering your reporting requirement addition to your
but as term loans or other credit facilities for the purposes of income recognition and asset
report made under Section 143 of the Companies Act, 2013 on the accounts of this NBFC as per
classification.
the prescribed Directions.
ix. An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Please explain what points are required to be known in respect of separate report to be given by
Investments” or other accounting standard, as applicable, (to the extent they are not inconsistent
you to the Board of Directors of this NBFC.
with the Directions) have been duly complied with by the NBFC.
Answer 5
x. In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC. Material to be included in the Auditor’s report to the Board Doirfectors:
xi. Verify that securities of the same type or class are received back by the lender/paid by the The auditor’s report on the accounts of a non-banking financial company shall include a statement on
borrower at the end of the specified period together with all corporate benefits thereof (i.e. the following matters, namely
dividends, rights, bonus, interest or any other rights or benefit accruing thereon). (A) In the case of a non-banking financial companies accepting/holding public deposits
xii. Verify charges received or paid in respect of securities lend/borrowed. Apart from the matters enumerated in (A) above, the auditor shall include a statement on the following
xiii. Obtain a confirmation from the approved intermediary regarding securities deposited with/ matters, namely-
borrowed from it as at the year end. (i) Whether the public deposits accepted by the company together with other borrowings indicated
xiv. An auditor should examine whether each loan or advance has been properly sanctioned. He below viz.
should verify the conditions attached to the sanction of each loan or advance i.e. limit on (a) from public by issue of unsecured non-convertible debentures/bonds;
borrowings, nature of security, interest, terms of repayment, etc.
(b) from its shareholders (if it is a public limited company); and
xv. An auditor should verify the security obtained and the agreements entered into, if any, with
(c) from entities which are not excluded from the definition of ‘public deposit’ in the Non-Banking
the concerned parties in respect of the advances given. He must ascertain the nature and value
of security and the net worth of the borrower/guarantor to determine the extent to which an Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, are
advance could be considered realisable. within the limits admissible to the company as per the provisions of the Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
xvi. Obtain balance confirmations from the concerned parties.
(ii) Whether the public deposits held by the company in excess of the quantum of such deposits
xvii. As regards bill discounting, verify that proper records/documents have been maintained for
permissible to it under the provisions of Non-Banking Financial Companies Acceptance of
every bill discounted/rediscounted by the NBFC. Test check some transactions with reference
Public Deposits (Reserve Bank) Directions, 2016 are regularised in the manner provided in the
to the documents maintained and ascertain whether the discounting charges, wherever, due,
said Directions;
have been duly accounted for by the NBFC.
(iii) Whether the non-banking financial company is accepting “public deposit” without minimum
xviii. Check whether the NBFC has not lent/invested in excess of the specified limits to any single
investment grade credit rating from an approved credit rating agency as per the provisions of
borrower or group of borrowers as per NBFC Prudential Norms.
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
xix. An auditor should verify whether the NBFC has an adequate system of proper appraisal 2016;
and follow up of loans and advances. In addition, he may analyse the trend of its recovery
(iv) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank in terms of
performance to ascertain that the NBFC does not have an unduly high level of NPAs.
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the Non-Banking Financial Company - Systemically Important Non-Deposit taking Company Question 6
and Deposit taking Company (Reserve Bank) Directions, 2016 has been correctly determined Kamna & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC.
and whether such ratio is in compliance with the minimum CRAR prescribed therein; The audit work has been completed. The audit team which was involved in the fieldwork came
(v) In respect of non-banking financial companies referred to in clause (iii) above, across various observations during the course of audit of this FNCB and have also limited
(a) whether the credit rating, for each of the fixed deposits schemes that has been assigned by one of understanding about the exceptions which are required to be reported in the audit report. They
the Credit Rating Agencies listed in Non- Banking Financial Companies Acceptance of Public would like to understand in detail regarding the obligations on the part of an auditor in respect
Deposits (Reserve Bank) Directions, 2016 is in force; and of exceptions in his reports that they can conclude their work. Please explain.
(b) whether the aggregate amount of deposits outstanding as at any point during the year has exceeded Answer 6
the limit specified by the such Credit Rating Agency; Obligation of auditor to submit an exception report to RBI
(vi) Whether the company has violated any restriction on acceptance of public deposit as provided in Where, in the case of a non-banking financial company, the statement regarding any of the items
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016; referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the auditor the
(vii) Whether the company has defaulted in paying to its depositors the interest and/or principal company has not complied with:
amount of the deposits after such interest and/or principal became due; (a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
(viii) Whether the company has complied with the prudential norms on income recognition, accounting (b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
standards, asset classification, provisioning for bad and doubtful debts, and concentration of 2016; or
credit/investments as specified in the Directions issued by the Bank in terms of the Master (c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company
Direction -Non-Banking Financial Company - Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important
Company and Deposit taking Company (Reserve Bank) Directions, 2016; Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
(ix) Whether the company has complied with the liquid assets requirement as prescribed by the Bank It shall be the obligation of the auditor to make a report containing the details of such unfavourable or
in exercise of powers under section 45-IB of the RBI Act and whether the details of the designated qualified statements and/or about the non-compliance, as the case may be, in respect of the company
bank in which the approved securities are held is communicated to the office concerned of the RBI to the concerned Regional Office of the Department of Non-Banking Supervision of the RBI under
in terms of NBS 3; Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016; whose jurisdiction the registered office of the company is located as per first Schedule to the Non-
(x) Whether the company has furnished to the RBI within the stipulated period the return on Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
deposits as specified in the NBS 1 to – Non- Banking Financial Company Returns (Reserve The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the
Bank) Directions, 2016; provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1)
(xi) Whether the company has furnished to the RBI within the stipulated period the quarterly return and such report shall not contain any statement with respect to compliance of any of those provisions.
on prudential norms as specified in the Non-Banking Financial Company Returns (Reserve
Bank) Directions,2016;
Question 7
(xii) Whether, in the case of opening of new branches or offices to collect deposits or in the case of
closure of existing branches/offices or in the case of appointment of agent, the company has The Statutory Auditor of the NBFC company is required to give a report to the Board of
complied with the requirements contained in the Non-Banking Financial Companies Acceptance Directors. What shall be the content of the Auditor’s Report to the Board.
of Public Deposits (Reserve Bank) Directions, 2016. Answer 7
Reasons to be stated for unfavorable or qualified statements: Where, in the auditor’s report, the The statutory auditor of Karma Pvt Ltd, being a Non-Deposit Taking Non-Systemically Important
statement regarding any of the items referred to in paragraph 3 above is unfavorable or qualified, NBFC is required to submit separate report to the Board of Directors on the matters as specified as
the auditor’s report shall also state the reasons for such unfavorable or qualified statement, as the below:
case may be. Where the auditor is unable to express any opinion on any of the items referred to in 1. Conducting Non-Banking Financial Activity without a valid Certificate of Registration (CoR)
paragraph 3 above, his report shall indicate such fact together with reasons therefor. granted by the RBI is an offence under chapter V of the RBI Act, 1934. Therefore, if the company

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is engaged in the business of non-banking financial institution as defined in section 45-I (a) of the 1. Where, in the case of a non-banking financial company, the statement regarding any of the items
RBI Act and meeting the Principal Business Criteria (Financial asset/income pattern) as laid down referred to in paragraph 3 of the Non-Banking Financial Companies Auditor’s Report (Reserve
vide the RBI’s press release dated April 08, 1999, and directions issued by DNBR, auditor shall Bank) Directions, 2016, is unfavourable or qualified, or in the opinion of the auditor the company
examine whether the company has obtained a Certificate of Registration (CoR) from the RBI. has not complied with:
2. In case of a company holding CoR issued by the RBI, whether that company is entitled to continue a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
to hold such CoR in terms of its Principal Business Criteria (Financial asset/income pattern) as on b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
March 31 of the applicable year. 2016; or
3. Whether the non-banking financial company is meeting the required net owned fund requirement as c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company
laid down in Master Direction - Non-Banking Financial Company – Non-Systemically Important (Reserve Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Master Direction - Non- Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit
It shall be the obligation of the auditor to make a report containing the details of such unfavourable or
taking Company (Reserve Bank) Directions, 2016.
qualified statements and/or about the non-compliance, as the case may be, in respect of the company
Apart from the aspects enumerated above, the auditor shall include a statement on the following to the concerned Regional Office of the Department of Non-Banking Supervision of the RBI under
matters, namely: - whose jurisdiction the registered office of the company is located as per first Schedule to the Non-
(i) Whether the Board of Directors has passed a resolution for non- acceptance of any public Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
deposits; 2. The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the
(ii) Whether the company has accepted any public deposits during the relevant period/year; provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph
(iii) Whether the company has complied with the prudential norms relating to income recognition, (1) and such report shall not contain any statement with respect to compliance of any of those
accounting standards, asset classification and provisioning for bad and doubtful debts as provisions.
applicable to it in terms of Non-Banking Financial Company – Non- Systemically Important
Non-Deposit taking Company (Reserve Bank) Directions, 2016;
Question 9
Where, in the auditor’s report, the statement regarding any of the items referred to matters specified
Mr. G. has been appointed as an auditor of LMP Ltd., a NBFC company registered with RBI.
above is unfavorable or qualified, the auditor’s report shall also state the reasons for such unfavorable
Mr. G is concerned about whether the format of financial statements prepared by LMP Ltd. is
or qualified statement, as the case may be. Where the auditor is unable to express any opinion on any
as per notification issued by the Ministry of Corporate Affairs (MCA) dated October 11, 2018.
of the items referred above, his report shall indicate such fact together with reasons there of.
The notification prescribed the format in Division III under Schedule III of the Companies Act,
2013 applicable to NBFCs complying with Ind- AS. Mr. G wants to know the differences in the
Question 8 presentation requirements between Division II and Division III of Schedule of the Companies
Act, 2013. Help Mr. G.
Krishna Pvt Ltd is primarily into the business of selling computer parts. However, the company
is fulfilling the Principal Business Criteria as at the balance sheet date i.e. Financial Assets are Answer 9
more than 50 % of total assets and Financial Income is more than 50% of Gross Income. What The presentation requirements under Division III for NBFCs are similar to Division II (Non NBFC)
shall be the obligation of the Statutory Auditor in such a scenario? to a large extent except for the following:
Answer 8 (a) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity
In the given case, Krishna Pvt Ltd is fulfilling the Principal Business Criteria i.e. Financial Assets which is not allowed to companies required to follow Division II.
are more than 50 % of total assets and Financial Income is more than 50 % of Gross Income. The (b) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other
company which fulfils both these criteria shall qualify as an NBFC and hence is required to obtain expenditure’ which exceeds 1 per cent of the total income. Division II, on the other hand, requires
Certificate of Registration (CoR) with Reserve Bank of India. In such a scenario, the statutory auditor disclosure for any item of income or expenditure which exceeds 1 per cent of the revenue from
has an obligation to submit exception report to the RBI on the following matters: operations o`r10 lakhs, whichever is higher.

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(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited (i) Whether the registration is required under section 45-IA of the RBI Act, 1934.
Liability Partnership (LLP) in which its director is a partner or member. (ii) If so, whether it has obtained the registration.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other (iii) If the registration not obtained, reasons thereof.
In the instant case Abhimanyu Finance Ltd. is a Non-Banking Finance Company and was in the business
of accepting public deposits and giving loans since 2015. The company was having net owned funds of `
(e) Separate disclosure of trade receivable which have significant increase in credit risk & credit 1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the prescribed limit i.e. 2 crore rupees
impaired and was also not having registration certificate from RBI (though applied for it on 30th March 2021). The
(f) The conditions or restrictions for distribution attached to statutory reserves have to be separately auditor is required to report on the same as per Clause (xvi) of Paragraph 3 of CARO 2020.
disclose in the notes as stipulated by the relevant statute.
Question 11
Question 10 “Fin crazy” is a P2P online platform owned by Future Technologies Pvt Limited which is
Abhimanyu Finance Ltd. is a Non-Banking Finance Company and was in the business of registered with RBI as NBFC. Peer to Peer Platform (P2P) means an intermediary providing
accepting public deposits and giving loan since 2015. The company was having net owned funds the services of loan facilitation via online medium or otherwise to the participants.
of` 1,50,00,000/(-one crore fifty lakhs) and was not having registration certificate from RBI and Participants have to enter into an arrangement with NBFC-P2P to lend on its platform or avail
applied for it on 30 th March 2023. The company appointed Mr. Kabra as its statutory auditors loan facilitation services provided by it. It provides only as a medium connecting lenders and
for the year 2022-2.3Advise the auditor with reference to auditor procedures to be taken and borrowers. It also carries out the credit assessment and risk profiling of the participants on
reporting requirements on the same in view of CARO 2020? the platform. It also provides services relating to loan documentation and loan recovery. The
Answer 10 company falls outside purview of upper layer.
As per Clause (xvi) of Paragraph 3 of CARO 2020, the auditor is required to report that “whether the Where does such NBFC fit into in accordance with scale-based regulations? Suggest few audit
company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and procedures for above NBFC-P2P.
if so, whether the registration has been obtained.” Answer 11
The auditor is required to examine whether the company is engaged in the business which attract the NBFC-P2P falls in base layer in accordance with scale-based regulations of RBI. Few audit procedures
requirements of the registration. The registration is required where the financing activity is a principal for NBFCP2P are as under: -
business of the company. The RBI restrict companies from carrying on the business of a non-banking
• Gaining an understanding of business conducted by NBFC-P2P. It should be verified that company
financial institution without obtaining the certificate of registration.
undertakes only permissible activities applicable to such type of NBFCs like providing online
Audit Procedures and Reporting: marketplace to participants for lending and borrowing. It should not be engaged in business of
1. The auditor should examine the transactions of the company with relation to the activities covered lending funds on its own.
under the RBI Act and directions related to the Non-Banking Financial Companies. • Verifying certificate of registration obtained from RBI for carrying business of P2P platform.
2. The financial statements should be examined to ascertain whether company’s financial assets • Verifying Board approved policy setting out eligibility criteria for participants i.e. lenders and
constitute more than 50 per cent of the total assets and income from financial assets constitute borrowers.
more than 50 per cent of the gross income.
• Verifying board approved policy for pricing of services provided by P2P platform
3. Whether the company has net owned funds as required for the registration as NBFC.
• Verification of adherence to lending and borrowing guidelines prescribed by RBI
4. Whether the company has obtained the registration as NBFC, if not, the reasons should be sought
• Verifying appropriate arrangements have been entered into among participants and NBFC-P2P.
from the management and documented.
• Compliance with reporting requirements of RBI
5. The auditor should report incorporating the following: -
• Verifying board approved policy for grievance redressal and complaints

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Question 12 Integrated Case Scenario

Sugam Housing Finance Limited is in the business of housing finance activities having asset size CA. Parampara is statutory auditor of “Lohit Finance Limited” a , Micro finance institution,
of ₹ 800 crores. Its principal business is of providing finances for housing mainly to individuals. working predominantly in states popularly described as “seven sisters of North East”, West Bengal,
It is not identified by RBI in upper layer. Under scale-based regulations introduced by RBI, Odisha and Andhra Pradesh. It is a non-deposit taking NBFC catering to credit requirements
what should be appropriate classification for such a company? of rural and semi-urban households and provides small ticket loans. She has performed audit
procedures for year 2022-23 and following further information is given as under: -
Is there any specific reporting requirement under CARO, 2020 for statutory auditor of a
company engaged in housing finance activities? (A) The Board of Directors of the company has passed a resolution in its meeting held on 1.5.22
for nonacceptance of public deposits during year ended 31st March, 2023.
Answer 12
(B) The company has obtained certificate of registration dated 15th March, 2012 from RBI
The said company is not identified in upper layer by RBI. Under scale based regulations introduced in pursuance of section 45-IA of RBI Act, 1934 and it is entitled to hold such certificate of
by RBI, NBFCs undertaking housing finance activities constitute “middle layer”. The asset size is not registration in terms of its financial assets/income pattern for year ended 31st March, 2023.
relevant in such a case. All housing finance companies not identified in upper layer would constitute
(C) The company has identified instances of cash embezzlement by the employees during
middle layer due to nature of such activities undertaken by them. the year. Such instances relate to employees fleeing after collection of instalments from
There is specific reporting requirement under CARO, 2020 under clause 3 (xvi)(b) which requires customers at some centres.
auditor to report whether the company has conducted any non-Banking financial or housing finance The total amount involved is `15 lacs and ` 5 lacs have been recovered subsequently. The
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the matter has also been reported in note 35 of financial statements.
Reserve Bank of India Act, 1934.
(D) It falls in middle layer of scale-based regulations and regulations for a systemically important
nondeposit taking NBFC are applicable to it. Its capital adequacy ratio is stated in note 36
of financial statements.
Question 13
(E) Audit procedures performed by her included testing design and operating effectiveness
You are auditor of a deposit taking NBFC (NBFC-D). The NBFC is identified by RBI in its upper
of controls relating to allowances for loan losses using Expected credit loss model (ECL)
layer and its financial statements are required to prepared in accordance with requirements of
in accordance with Ind AS 109. Tests of details performed by her included verifying
Ind AS. The following is extract of statement of profit and loss for year ending 31St March, 2023
assumptions affecting ECL calculations.
in accordance with Division III of Schedule III of Companies Act, 2013. Previous year figures
are ignored. Keeping in view above information, answer the following questions: -
Ongoing through details of head “other expenditure” in expenses side of statement of profit and 1. The Board of Directors has passed a resolution for non- acceptance of public deposits during
loss, it is noticed that there is an expenditure relating to manpower outsourcing cost amounting year 2022-23. Which of the following statements is most appropriate in this regard as regards
to ₹99.50 crores included under “other expenditure” reporting obligations of auditor are concerned?
Does it meet the requirements of Division III of Schedule III of Companies Act, 2013? a) Passing of board resolution for non-acceptance of public deposits, being an internal governance
matter, is not required to be reported by auditor.
Answer 13
b) Matter of passing of board resolution for non-acceptance of public deposits is a specific reporting
An NBFC is preparing financial statements in accordance with requirements of Division III of Schedule
requirement for auditor under CARO, 2020.
III of Companies Act, 2013 has to separately disclose by way of note any item of “other expenditure”
exceeding 1% of total income. c) Matter of passing of board resolution for non-acceptance of public deposits is a specific reporting
requirement in auditor’s additional report to the Board of Directors of the company.
The said expenditure of ₹99.50 crore does not exceed 1% of total income. Hence, it meets requirements
of Division III of Schedule III of Companies Act, 2013. d) Matter of passing of board resolution for non-acceptance of public deposits is a specific reporting
requirement in auditor’s additional report to the Board of Directors of the company as well as
under CARO, 2020.
Ans: (c)

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2. Which of the following statements is most appropriate in respect of reporting requirements c) Auditor has to ascertain and verify whether such ratio as disclosed in NBS-7 has been correctly
relating to certificate of registration of the company obtained from RBI as described in para [B] arrived at and whether such ratio is in compliance with minimum CRAR prescribed by RBI.
of the case? d) Auditor has to ascertain and verify whether such ratio has been disclosed in financial statements
a) It is the duty of auditor to report whether company has obtained certificate of registration as required in notes to accounts and has been correctly arrived at and is in compliance with minimum CRAR
under section 45-IA of RBI Act, 1934 in auditor’s additional report to the Board of Directors of the prescribed by RBI.
company. Ans: (c)
b) It is the duty of auditor to report whether company has obtained certificate of registration as required
under section 45-IA of RBI Act, 1934 in auditor’s additional report to the Board of Directors of the
company as well as under CARO,2020. 5. The auditor has performed audit procedures relating to allowances for loan losses using ECL
in accordance with Ind AS 109. As these allowances involve significant judgment and estimates,
c) It is the duty of auditor to report whether company has obtained certificate of registration as she wants to state how it was addressed by her. How she can do that?
required under section 45-IA of RBI Act, 1934 under CARO,2020.
a) By stating it in Auditor’s additional report to Board of Directors.
d) It is the duty of auditor to report whether company has obtained certificate of registration as required
under section 45-IA of RBI Act, 1934 in auditor’s additional report to the Board of Directors of b) By stating it in matters as required under Section 143(3) of Companies Act.
the company as well as under CARO,2020. Further, it is also required to be reported in auditor’s c) By incorporating Emphasis of Matter Paragraph in Independent auditor’s report.
additional report to Board of Directors whether company is entitled to hold such certificate in d) By identifying it as Key audit matter in Independent auditor’s report.
terms of its financial assets/income pattern.
Ans: (d)
Ans: (d)
3. Regarding instances of cash embezzlement identified by the company during the year, which
of the following statements best fits into reporting requirements of an auditor?
a) Such instances are required to be reported under CARO, 2020 under relevant clause.
b) Cash embezzled amount is less than `1 crore. No reporting under CARO, 2020 is required of such
instances.
c) Such instances are required to be reported under CARO, 2020 as well as in auditor’s additional
report to Board of Directors of company.
d) Such instances are to be specifically reported in auditor’s report under Section 143(3) of Companies
Act,2013.
Ans: (a)
4. As regards description of capital adequacy ratio as described in para [D] of case, which of the
following statements meets regulatory reporting requirements?
a) Auditor has to ascertain and verify whether such ratio has been disclosed in financial statements
in notes to accounts.
b) Auditor has to ascertain and verify whether such ratio as disclosed in NBS-7 has been correctly
arrived at.

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SPECIAL FEATURES OF AUDIT OF BANKS & NON-BANKING FINANCIAL COMPANIES
CA Harshad Jaju
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15
CHAPTER
AUDIT OF
PUBLIC SECTOR
UNDERTAKINGS
Question 1
The Comptroller and Auditor General assists the legislature in reviewing the performance of
public undertakings. He conducts an efficiency-cum-performance audit other than the field
which has already been covered either by the internal audit of the individual concerns or by the
professional auditors. He locates the area of weakness for managements’ information. Explain
stating clearly the issues examined in comprehensive audit (MTP 4 Marks, Oct 19)
OR
Solar Limited is a public sector undertaking engaged in production of electricity from solar
power. It has started a new project near Puducherry with a new technology for a cost of Rs.
9,750 crore. Though there is delay in commencement of project and accordingly, there has been
overrun in the cost. State the matters C&AG while conducting Comprehensive Audit may cover
in reporting on the performance and efficiency of this project. (MTP 4 Marks, Oct 20, MTP 5
Marks Apr’21, PYP 4 Marks Nov’18, MTP 5 Marks Sep’22, Old & New SM)
OR
Bahubali & Co., a CA. firm was appointed by C&AG to conduct comprehensive audit of
Brahmi Ltd., a public sector undertaking. C&AG advised Bahubali & Co. to cover areas such
as investment decisions, project formulation, organisational effectiveness, capacity utilisation,
management of equipment, plant and machinery, production performance, use of materials,
productivity of labour, idle capacity, costs and prices, materials management, sales and credit
control, budgetary and internal control systems, etc.
Discuss stating the issues examined in comprehensive audit. (MTP 5 Marks March 22,RTP May 20)
Answer 1
The Comptroller and Auditor General assist the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has already
been covered either by the internal audit of the individual concerns or by the professional auditors. He
locates the area of weakness and extravagance for managements’ information.
The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending on
the nature of the enterprise, its objectives and operations. However, in general, the covered areas are
those of investment decisions, project formulation, organisational effectiveness, capacity utilisation,
management of equipment, plant and machinery, production performance, use of materials, productivity
of labour, idle capacity, costs and prices, materials management, sales and credit control, budgetary
and internal control systems, etc.
CA Harshad Jaju
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AUDIT OF PUBLIC SECTOR UNDERTAKINGS AUDIT OF PUBLIC SECTOR UNDERTAKINGS
Some of the issues examined in comprehensive audit are: practices are required to be looked into by the auditor. Areas of propriety audit under the provisions
(i) How does the overall capital cost of the project compare with the approved planned costs? of Section 143(1) may be following:
Were there any substantial increases and, if so, what are these and whether there is evidence of (i) Whether the terms on which secured loans and secured advances have been made are prejudicial
extravagance or unnecessary expenditure? to the interests of the company or its members”: It may be appreciated that the terms of loans
(ii) Have the accepted production or operational outputs been achieved? Has there been include such matters as security, interest, repayment period and other business considerations.
underutilization of installed capacity or shortfall in performance and, if so, what has caused it? The auditor has to inquire whether the terms are such that they can be adjudged as prejudicial
to the legitimate interest of the company or of its shareholders. This is a process of judging a
(iii) Has the planned rate of return been achieved?
situation by reference to certain objective standards or reasonableness whether the terms entered
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What has into are prejudicial or not, not only to the company but also to the shareholders.
been the effect on the gestation period and capital cost?
(ii) Whether transactions of the company which are represented merely by book entries are prejudicial
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials to the interests of the company: This proposition has got to be inquired into by reference to
consumption, etc.? the effects of the book entries, unsupported by transactions, on the legitimate interests of the
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in company. The auditor has to exercise his judgment based on certain objective standards. It is
redundancy in stores and spares? also possible that some transactions may not adversely affect the interests of the company. The
auditor has to judiciously consider what does and does not constitute the interest of the company.
(vii) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs (iii) Whether investment of companies, other than a banking or an investment company, in the
through technological progress? form of shares, debentures and other securities have been sold at a price lower than the cost:
Apparently, this is a matter of verification by the auditor. The intention, however, is not known
(viii) If the enterprise has an adequate system of repairs and maintenance?
whether loss has occurred due to the sale. The auditor is required to inquire into circumstances of
(ix) Are procedures effective and economical? sale of investments that resulted in loss. Obviously, the duty cast on him is propriety based, i.e.,
(x) Is there any poor or insufficient or inefficient project planning? reasonableness of the decision to sell at a loss. It involves exercise of judgment having regard to
the circumstances in which the company was placed at the time of making the sale.
The efficiency and effectiveness audit of public enterprises is conducted on the basis of certain
standards and criteria. Profit is not the key criterion on performance; management’s performance (iv) Whether loans and advances made by the company have been shown as deposits. Again,
in the economical and efficient use of public funds and in the achievement of objectives is more considering the propriety element, rationalizing the proper disclosure of loans and advance given
relevant. Public enterprises have been set up with certain socio-economic purposes and for fulfillment by company is made:
of certain objectives. The objectives vary from enterprise to enterprise. Audit appraisal analyses the (v) Whether personal expenses have been charged to revenue: It is an accepted principle that expenses
performance of an enterprise to bring out the extent to which the objectives for which the enterprise which are not business expenses should not be charged to revenue. The effect of charging personal
was set up have been served. expenses to the business is to distort the profitability of the company and to secure a personal
gain at the cost of the company. Obviously, propriety is involved in this; charging personal
expenses to business account is highly improper and abusive hence this provision.
Question 2
(vi) In case it is stated in the books and papers of the company that shares have been allotted for cash,
Tee & Co., a firm of Chartered Accountants had been appointed by C & AG to conduct statutory
whether cash has actually been received in respect of such allotment, and if no cash actually
audit of M/s Rare Airlines Limited, a Public Sector Company. They would like to check certain
received, whether the position in books of account and balance sheet so stated is correct, regular
mandatory propriety points as required under section143(1) of the Companies Act, 2013. List
and not misleading: A control has been set up to verify the receipt of cash in case of allotment
the areas of check to meet these requirements. (MTP 4 Marks, April 19)(PYP 4 Marks May 18)
of shares for cash. Further, if cash is not received, the books of accounts and statement of affairs
Answer 2 shows the true picture.
Mandatory Propriety Points under section 143 (1) of the Companies Act, 2013: The requirement of
the provisions of section 143(1) is essentially propriety-oriented as much as some specific dubious

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Question 3 Answer 4
ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance The Comptroller & Auditor General of India plays a key role in the functioning of the financial
audit of a Sugar Industry. List out the factors to be considered generally by ABG & Co., while committees of Parliament and the State Legislatures. He has come to be recognized as a ‘friend,
planning a performance audit of Sugar Industry? (MTP 4 Marks, March 18) philosopher and guide’ of the Committees. It is ensured as follows: -
Answer 3 (i) His reports generally form the basis of the Committees’ working, although they are not precluded
Factors to be considered while planning the Performance Audit: While planning a performance from examining issues not brought out in his reports
audit of Sugar Industry, the auditors should take care of certain factors which are listed below: (ii) He scrutinizes the notes which the Ministries submit to the Committees and helps the Committees
(i) to consider significance and the needs of potential users of the audit report. to check the correctness of submissions to the Committees and facts and figures in their draft
reports
(ii) to obtain an understanding of the program to be audited.
(iii) The financial Committees present their report to the Parliament/ State Legislature with their
(iii) to consider legal and regulatory requirements.
observations and recommendations.
(iv) to consider management controls.
The various Ministries / Department of the Government are required to inform the Committees of the
(v) to identify criteria needed to evaluate matters subject to audit. action taken by them on the recommendations of the Committees (which are generally accepted) and
(vi) to identify significant findings and recommendations from previous audits that could affect the the Committees present Action Taken Reports to Parliament / Legislature
current audit objectives. Auditors should determine if management has corrected the conditions (iv) In respect of those audit reports, which could not be discussed in detail by the committees’,
causing those findings and implemented those recommendations. written answers are obtained from the Department / Ministry concerned and are sometimes
(vii) to identify potential sources of data that could be used as audit evidence and consider the validity incorporated in the Reports presented to the Parliament / State Legislature.
and reliability of these data, including data collected by the audited entity, data generated by the This ensures that the audit reports are not taken lightly by the Government, even if the entire report is
auditors, or data provided by third parties. not deliberated upon by the Committee.
(viii) to consider whether the work of other auditors and experts may be used to satisfy some of the The functions of “Estimates Committee” are: -
auditors’ objectives.
(i) to report what economies, improvements in organization, efficiency or administrative reform,
(ix) to provide sufficient staff and other resources to do the audit. consistent with the policy underlying the estimates may be effected
(x) to prepare a written audit plan. (ii) to suggest alternative policies
(iii) to examine whether the money is well laid out within the limit and
Question 4 (iv) to suggest the form in which the estimates shall be presented to Parliament.
The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognized as a ‘friend,
Question 5
philosopher and guide’ of the Committees. In view of above, you are required to list down any
four role. (4 Marks, Oct 18) The Comptroller and Auditor General of India has appointed a chartered accountant firm to
conduct the comprehensive audit of Tram Company Limited (a listed government company)
OR
which is handling the Metro project of the metropolitan city for the period ending 31-03-2021.
The Comptroller & Auditor General of India plays a key role in functioning of financial The work to be conducted under Project ‘D’ handled by the Tram Company Limited was
committees of Parliament and state legislatures. Therefore, he has come to be recognized as of laying down railway line of 124 kilometers. [The chartered accountant firm reviewed the
a friend, philosopher and guide of committees. Discuss how such a role is ensured in practice. internal audit report and observed the shortcoming reported about the performance of Project
Also, briefly discuss the functions of “Estimates Committee” of Parliament. (MTP 5 Marks Oct ‘D’ regarding the understatement of the Current liabilities and Capital work in progress by `
’23) 95.39 crore.] Explain some of the matters to be undertaken by the chartered accountant firm
while conducting the comprehensive audit of Tram Company Limited. (MTP 5 Marks April 22)
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OR Question 6
The Comptroller and Auditor General of India has appointed a chartered accountant firm to “The C & AG may direct the appointed auditor about the manner in which the accounts of the
conduct the comprehensive audit of Metro Company Limited (a listed government company) Government Company are required to be audited and thereupon the auditor so appointed shall
which is handling the Metro project of the metropolitan city for the period end ing 31-03- submit a copy of the audit report to the Comptroller and Auditor-General of India”. What are
2020. The work to be conducted under Project A handled by the Metro Company Limited was the relevant sections of the Companies Act, 2013 and steps involved in the audit of Government
of laying down railway line of 124 kilometers. [The chartered accountant firm reviewed the Companies?(MTP 5 Marks March ’23, RTP May 18, Old SM)
internal audit report and observed the shortcoming reported about the performance of Project Answer 6
A regarding the understatement of the Current liabilities and Capital work in progress by ~
The following steps are involved in the audit of government companies:
84.68 crore.] Explain some of the matters to be undertaken by the chartered accountant firm
while conducting the comprehensive audit of Metro Company Limited. (PYP 5 Marks, Jan ‘21) (i) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of
the Companies Act, 2013 - Statutory auditors of Government Companies are appointed or
Answer 5
re-appointed by the C&AG. There is thus, a departure from the practice in vogue in the case
A CA Firm has been appointed to conduct comprehensive audit of Tram Company Limited, which is of private sector companies where appointment or re-appointment of the auditors and their
a listed Govt Company handling the Metro project. CA firm has observed the shortcomings as stated remuneration are decided by the members at the annual general meetings. In the case of
in internal audit report regarding understatement of Current liabilities and CWIP by ` 95.39 crore. government companies, though the appointment of statutory auditors is done by the C&AG, the
Matters to be undertaken by the CA Firm while conducting the comprehensive audit of Tram Company remuneration is left to the individual companies to decide based on certain guidelines given by
Limited are: the C&AG in this regard.
(i) How does the overall capital cost of the project compare with the approved planned costs? (ii) The C&AG may direct the appointed auditor on the manner in which the accounts of the
Were there any substantial increases and, if so, what are these and whether there is evidence of Government company are required to be audited and the auditor so appointed has to submit a
extravagance or unnecessary expenditure? copy of the audit report to the Comptroller and Auditor-General of India. The report, among
(ii) Have the accepted production or operational outputs been achieved? Has there been other things, includes the directions, if any, issued by the C&AG, the action taken thereon and
underutilisation of installed capacity or shortfall in performance and, if so, what has caused it? its impact on the accounts and financial statement of the company.
(iii) Has the planned rate of return been achieved? The report under section 143(5) is in addition to the reports issued by the Statutory Auditors
under various other clauses of section 143.
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What has
been the effect on the gestation period and capital cost? (iii) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 -The Comptroller
and Auditor-General of India shall within 60 days from the date of receipt of the audit report
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
have a right to conduct a supplementary audit of the financial statements of the government
consumption, etc.?
company by such person or persons as he may authorize in this behalf and for the purposes
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in of such audit, require information or additional information to be furnished to any person or
redundancy in stores and spares? persons, so authorised, on such matters, by such person or persons, and in such form, as the
(vii) Does the enterprise have research and development programmes? What has been the performance C&AG may direct.
in adopting new processes, technologies, improving profits and in reducing costs through (iv) Comment upon or supplement such Audit Report under section 143(6)(b) of the Companies
technological progress? Act, 2013 - Any comments given by the C&AG upon, or in supplement to, the audit report
(viii) If the enterprise has an adequate system of repairs and maintenance? issued by the statutory auditors shall be sent by the company to every person entitled to copies
of audited financial statements under sub-section (1) of section 136 of the said Act i.e. every
(ix) Are procedures effective and economical?
member of the company, to every trustee for the debenture-holder of any debentures issued by
(x) Is there any poor or insufficient or inefficient project planning? the company, and to all persons other than such member or trustee, being the person so entitled
and also be placed before the annual general meeting of the company at the same time and in
the same manner as the audit report.

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(v) Test audit under section 143(7) of the Companies Act, 2013 -Without prejudice to the Thus, rejection of audit report (submitted by audit firm) by C&AG is in order as audit with a view to
provisions relating to audit and auditor, the C&AG may, in case of any company covered under mere check all the expenses of the unit are in conformity to the public interest and publicly accepted
sub-section (5) or sub-section (7) of section 139 of the said Act, if he considers necessary, by customs done by audit firm is not performance audit in all aspects.
an order, cause test audit to be conducted of the accounts of such company and the provisions
of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of
Service) Act, 1971, shall apply to the report of such test audit. Question 8
“A performance audit is an objective and systematic examination of evidence for the purpose
of providing an independent assessment of the performance of a government organization,
Question 7 program, activity, or function in order to provide information to improve public accountability
C & AG appointed a chartered accountant firm to conduct Performance audit of OM Ltd., a and facilitate decision-making by parties with responsibility to oversee or initiate corrective
PSU of Govt. of India. The firm conducted the audit with a view to check all the expenses of the action.” Briefly discuss the issues addressed by Performance Audits conducted in accordance
unit are in conformity with the public interest and publicly accepted customs. The audit report with the guidelines issued by C&AG. (RTP Nov 18, RTP May 20, Old & New SM)
submitted by audit firm was rejected by C&AG. Give your opinion on the action of C&AG. Answer 8
(MTP 5 Marks April ’23, RTP Nov’22, Old & New SM)
According to the guidelines issued by the C&AG, Performance Audits usually address the issues of:
Answer 7
(i) Economy- It is minimising the cost of resources used for an activity, having regard to appropriate
In the given scenario, C&AG appointed a chartered accountant firm to conduct Performance Audit quantity, quality and at the best price.
of OM Ltd., a PSU of Government of India. The firm conducted audit with a view to check all the
Judging economy implies forming an opinion on the resources (e.g. human, financial and material)
expenses of the unit are in conformity to the public interest and publicly accepted customs which is
deployed. This requires assessing whether the given resources have been used economically and
not Performance Audit.
acquired in due time, in appropriate quantity and quality at the best price.
A performance audit is an objective and systematic examination of evidence for the purpose of
(ii) Efficiency- It is the input-output ratio. In the case of public spending, efficiency is achieved when
providing an independent assessment of the performance of a government organization, program,
the output is maximised at the minimum of inputs, or input is minimised for any given quantity
activity, or function in order to provide information to improve public accountability and facilitate
and quality of output.
decision-making by parties with responsibility to oversee or initiate corrective action.
Auditing efficiency embraces aspects such as whether:
Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance (a) sound procurement practices are followed;
audit, the subordinate offices are guided by manual and auditing standards prescribed by C&AG. (b) resources are properly protected and maintained;
Therefore, the objectives of performance auditing are evaluation of economy, efficiency, and (c) human, financial and other resources are efficiently used;
effectiveness of policy, programmes, organization and management. It also promotes accountability
(d) optimum amount of resources (staff, equipment, and facilities) are used in producing or delivering
by assisting those charged with governance and oversight responsibilities to improve performance;
the appropriate quantity and quality of goods or services in a timely manner;
and transparency by affording taxpayers, those targeted by government policies and other stakeholders
an insight into the management and outcomes of different government activities. (e) public sector programmes, entities and activities are efficiently managed, regulated, organized
and executed;
Performance auditing focuses on areas in which it can add value which have the greatest potential
for development. It provides constructive incentives for the responsible parties to take appropriate (f) efficient operating procedures are used; and
action. Regulations on Audit and Accounts issued by C&AG lay down that the responsibility (g) the objectives of public sector programmes are met cost-effectively.
for the development of measurable objectives and performance indicators as also the systems of
(iii) Effectiveness- It is the extent to which objectives are achieved and the relationship between the
measurement rests with the Government departments or Heads of entities. They are also required to
intended impact and the actual impact of an activity.
define intermediate and final outputs and outcomes in measurable and monitorable terms, standardise
the unit cost of delivery and benchmark quality of outputs and outcomes. In auditing effectiveness, performance audit may, for instance:
(a) assess whether the objectives of and the means provided (legal, financial, etc.) for a new or
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ongoing public sector programme are proper, consistent, suitable or relevant to the policy; (A) Understanding the Entity/Programme - It is the starting point for planning individual
(b) determine the extent to which a program achieves a desired level of program results; performance audit.
(c) assess and establish with evidence whether the observed direct or indirect social and economic The auditor may use the following sources for understanding the entity:
impacts of a policy are due to the policy or to other causes; (i) Documents of the entity: Documents on administration and functions of the entity, policy files,
(d) identify factors inhibiting satisfactory performance or goal-fulfilment; annual reports, budget documents, accounts, minutes of meetings, information on the website,
internal audit reports, electronic databases and MIS reports, RTI material etc.
(e) assess whether the programme complements, duplicates, overlaps or counteracts other related
programmes; (ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee, and
(f) assess the effectiveness of the program and/or of individual program components;
letters from Members of Parliament.
(g) determine whether management has considered alternatives for carrying out the program that
(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.
might yield desired results more effectively or at a lower cost;
(iv) Academic or special research: Independent evaluations on the entity, academic research and
(h) assess the adequacy of the management control system for measuring, monitoring and reporting
similar work done by other governments and other SAIs.
a programme’s effectiveness;
(v) Past audits: Past financial and performance audits of the entity provide a major source of
(i) assess compliance with laws and regulations applicable to the program; and identify ways of
information and understanding.
making programmes work more effectively.
(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in
a transparent manner.
Question 9 (vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World
The objectives of audit in connection with a State Electricity Distribution Company were to Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.
ascertain whether the: (B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined in a
(i) total cost of providing electricity is being recovered by timely submissions to the State succinct manner as they will impact the nature of the audit, govern its conduct and affect audit
Electricity Regulatory Commission; conclusions. Setting audit objectives ensures good quality performance audits. It facilitates
clarity, demonstrates the consistent quality of audit and serves as a measure of quality assurance
(ii) tariff orders, sales circulars and sales instructions were issued timely, without any
of the audit. Defining the scope constricts the audit to significant issues that relate to the audit
ambiguity. They were implemented in time;
objectives. It mainly focuses on the extent, timing and nature of the audit.
(iii) metering, billing and collection was managed efficiently and effectively;
(C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a
(iv) monitoring and internal controls were efficient. program meets or exceeds expectations. It provides a context for understanding the results of
What kind of audit is referred in the above scenario? Also briefly discuss the steps suggested to the audit.
the auditors for planning such an audit. (RTP May 22, New SM) Audit criteria are reasonable and attainable standards of performance against which economy,
OR efficiency and effectiveness of programmes and activities can be assessed. The audit criteria may be
ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance sought to be obtained from the following sources:
audit of a Sugar Industry. What factors should be considered by ABG & Co., while planning a (i) procedure manuals of the entity.
performance audit of Sugar Industry? (Old SM) (ii) policies, standards, directives, and guidelines.
Answer 9 (iii) criteria used by the same entity or other entities in similar activities or programmes.
In the given scenario, in view of the objectives discussed, performance audit is being referred. (iv) independent expert opinion and know how.
The following steps are suggested to the auditors for planning while conducting the performance
(v) new or established scientific knowledge and other reliable information.
audit:

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(vi) general management and subject matter literature and research papers. (G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria,
(D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be applicable audit approach, data collection etc., the audit team should prepare an Audit Design Matrix. It is
to all types of subjects of performance audits. The selection of approach also determines methods a structured and highly focused approach to designing a performance audit study.
and means used for conducting the audit. The ADM highlights the data collection and analysis method as well as the type and sources of
Some of the methods which could be used in conducting performance audits include: evidence required to support audit opinion/findings.
(i) Analysis of procedures: It involves review of the systems in place for planning, conducting, A specimen of ADM is given as under:
checking and monitoring the activity. This would consist of examination of documents such as
Data Collection
financial reports, budgets, programme guidelines, procedure manuals, etc. Audit Objective Audit Questions
Audit Criteria (3) Evidence (4) and Analysis
(1) (2)
(ii) Case studies: A case study is a descriptive analysis of an entity, scheme or programme. It Method (5)
involves analysis of a particular issue within the context of the whole area under review.
(iii) Use of existing data: The audit staff should investigate the data held by entity management and
by other relevant sources. Audit conclusions based on testing of available data for correctness An ADM is prepared on the basis of information and knowledge obtained during the planning stage.
and completeness enhances the assurance level. A well-designed ADM leads to effective audits thus providing the highest assurances to the auditing
(iv) Surveys: Survey is a method of collecting information from members of a population to assess entities. It is desirable to prepare ADM for each of the audit objectives.
the interrelation of events and conditions. Surveys on predetermined parameters can supplement (H) Establishing Time-Table and Resources - It is significant to determine the timetable and
the audit findings and conclusions adding value to the performance audits. desirable resources. Selection of an appropriate audit team is the most vital component in
(v) Analysis of results: It requires the auditor to carry out actual output-input analysis to determine planning an audit. Considerations for the selection of an appropriate audit team should be
the efficiency of the programme. recorded along with the proposed timelines for various activities to be undertaken as a part of the
(vi) Quantitative analysis: It involves an examination of available data relating to financials like audit process. The progress should also be monitored against these timelines. The Accountant
earnings, revenue, or data relating to programme implementation like details of beneficiaries General would be liable for ensuring that the performance audit is completed on time. The
etc. However, it may not be possible for the auditor to work with complete data due to its high variations between the required and actual time spent should be compared and approved from
volume. In such cases, sampling techniques are required to be used. the competent authority.
(E) Developing Audit Questions - Subsequent to designing of audit objectives and determination The team should build time for translation, approval and possible delays in their own schedule
of audit criteria, the audit team is required to prepare a list of questions to which they would in order to meet the targets.
seek answers. The questions should be framed in a comprehensive manner involving a detailed (I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about
hierarchy of questions. the intention of taking up planned performance audit with the scope and extent of audit including
(F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that the constitution of an audit team and the tentative time schedule, well before the commencement
the performance auditors possess special aptitude and knowledge. The Auditing Standards of of Audit. Acknowledgement of this may be requested and placed on record.
C&AG of India provide that the audit institution should develop and train the auditors to enable It may be required to refine an audit’s objectives as the audit progresses for gathering the
them to perform their tasks effectively & efficiently and should prepare manuals & other written requisite information to fulfil the audit. The reasons for such changes in the objectives should
guidance notes & instructions concerning the conduct of audits. also be recorded and approved by the competent authority. The audit programme should be
Given the diverse range of subjects of performance auditing, the audit team needs to develop a sound flexible and reviewed from time to time as it is not possible to anticipate all the contingencies at
understanding of the programme or entity proposed to be audited. the early stage. The Accountant General should share all significant refinements in the approach
and additional tests and findings, concurrently with other audit teams when different persons
The audit team needs to decide at the planning stage on which aspect of expertise is required. conduct the audit at different locations. The system of sharing of the significant field audit
Though the Accountant General may use the work of an expert, he retains full responsibility for the experience should be documented and reviewed.
expression of opinion in the auditor’s report.

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Question 10 (ii) comment upon or supplement such audit report under section 143(6)(b): It may be noted that any
Siddha Ltd., a company wholly owned by central government was disinvested during the comments given by the Comptroller and Auditor-General of India upon, or supplement to, the
previous year, resulting in 40% of the shares being held by public. The shares were also listed audit report shall be sent by the company to every person entitled to copies of audited financial
on the BSE. Since the shares were listed, all the listing requirements were applicable, including statements under sub-section (1) of section 136 i.e. every member of the company, to every
publication of quarterly results, submission of information to the BSE etc. trustee for the debenture-holder of any debentures issued by the company, and to all persons other
than such member or trustee, being the person so entitled and also be placed before the annual
Mahavir, the FM of the company is of the opinion that now the company is subject to stringent
general meeting of the company at the same time and in the same manner as the audit report.
control by BSE and the markets, therefore the auditing requirements of a limited company
in private sector under the Companies Act 2013 would be applicable to the company and the In view of above provisions, the approach of directors of Sunlight Ltd. is not correct. They are required
C&AG will not have any role to play. Comment. (RTP May ’23, Old & New SM) to mandatory send the Supplementary Audit Report and comments of C&AG to every member of the
company etc. as prescribed and also be placed before the annual general meeting of the company
Answer 10
in the same manner as in case of audit report. Since in the given case neither the report has been
Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in which distributed nor discussed in the Annual General Meeting, the directors of the company will be liable
not less than 51% of the paid-up share capital is held by the Central Government or by any State
for contravention of aforesaid sections..
Government or Governments or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government company.
The auditors of these government companies are firms of Chartered Accountants, appointed by the Question 12
Comptroller & Auditor General, who gives the auditor directions on the manner in which the audit The reports of the Comptroller and Auditor General of India on the audit of PSUs are presented
should be conducted by them. to the Parliament and to various state legislatures to facilitate a proper consideration. Enumerate
In the given situation, Siddha Ltd is a company wholly owned by central government was disinvested the contents of Audit Report presented by C & AG. (PYP 5 Marks Dec ’21, New SM)
during the previous year, resulting in 40% of the shares being held by public. The shares were also Answer 12
listed on the BSE. The listing of company’s shares on a stock exchange is irrelevant for this purpose
and hence, Mahavir’s opinion is not correct. To facilitate a proper consideration, the reports of the C&AG on the audit of PSUs are presented to
the Parliament in several parts consisting of the following:
(i) Introduction containing a general review of the working results of Government companies,
Question 11
deemed Government companies and corporations;
On receipt of statutory audit report on 30-03-2018 of M/s Sunlight Ltd., a government company,
(ii) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board;
C&AG on 25-05-2018 appointed M/s Veeru & Associates to conduct supplementary audit u/s
143(6)(a) of the Companies Act, 2013. They submitted their report to C&AG as per their scope (iii) Resume of the company auditors’ reports submitted by them under the directions issued by the
of work. The Company held its AGM on 01-09-2018 but directors did not think it necessary C&AG and that of comments on the accounts of the Government companies; and
to discuss supplementary auditor’s report and comment of the C&AG. Is the approach (iv) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.
of the directors of Sunlight Ltd. correct? Guide the company with the provisions related to For certain specified states, the C&AG submits a separate audit report (commercial) to the
supplementary audit. (PYP 5 Marks, May ‘19) legislature, while for other States/Union Territories with legislature, there is a commercial
Answer 11 chapter in the main audit report. The State audit reports, contains both the results of audit
The Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the appraisal of performance of selected companies/corporations as well as important individual
audit report have a right to, instances of financial irregularities, wasteful expenditure, system deficiencies noticed by the
statutory auditors, and a general review of the working results of Government companies and
(i) conduct a supplementary audit under section 143(6)(a), of the financial statement of the company
corporations.
by such person or persons as he may authorize in this behalf; and for the purposes of such
audit, require information or additional information to be furnished to any person or persons, so
authorized, on such matters, by such person or persons, and in such form, as the Comptroller and
Auditor-General of India may direct; and

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Multiple Choice Questions (MCQs) would involve significant time. Further the management of the company is quite surprised as
to why this audit should be conducted as this is not a company subject to such types of audits
Question 1
as per law. The management of the company would like to have your inputs in respect of this
In Case of PSU, Direct Reporting Engagement does not include matter. Please guide.
(a) Performance audits (a) The notice for such type of audit should give reasonable time to the management to prepare
(b) compliance audits themselves. Further it should not be a detailed audit requiring significant time of the company.
(c) Financial audits (b) The C&AG may conduct such type of audits in respect of NOP Ltd. which would get covered in
this criteria, however, the notice for conducting such type of audit should give reasonable time to
(d) Comprehensive Audit (MTP 1 Mark ,Mar 19, MTP 1 Mark Apr’21)
the management to prepare themselves.
Answer 1 : (c)
(c) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013.
The company should write to the Registrar of Companies in respect of this matter and till that time
Question 2 no audit can be started.
You have been given an assignment of audit of IT department of a PSU. A checklist was handed (d) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013.
over to you which contained many questions such as, Further wherever this is applicable that is only for a small period of time. The company should
write to the Ministry of Corporate Affairs in respect of this matter. (MTP 1 Mark Oct ’23)
• Are separate usernames and passwords assigned to individual users?
Answer 3 : (b)
• Are periodical changes of passwords ensured?
• Are external (offsite) data backups maintained at a place outside the premises? The type of audit
being conducted is likely to be: Question 4
(a) Comprehensive audit. With respect to audit of public sector undertaking, which among the below is related to propriety
(b) Propriety audit. audit?
(c) Compliance audit. (a) This audit is carried out by assessing whether activities, financial transactions and information
comply in all material aspects, with the regulatory and other authorities which govern the audited
(d) Financial audit. (MTP 1 Mark Sep ’23, Oct’22, RTP May’23)
entity.
Answer 2 : (d)
(b) This auditing focuses on the areas in which it can add value which have the greatest potential for
development. It provides constructive incentives for the responsible parties to take appropriate
action.
Question 3
(c) It is an audit under which the C&AG does not really cover again the field which has already been
NOP Ltd. is a joint venture of Central Government and a private company and is engaged in the
covered. He conducts an appraisal or an efficiency cum performance audit.
business of distribution of electricity in Chennai. The Central Government holds 51% shares of
the company. The company is acknowledged for its consumer-friendly practices. Initially it was (d) It stands for verification of transactions on the tests of public interest, commonly accepted customs
completely owned by the Government and was running into significant losses but after the joint and standards of conduct. This audit is directed towards an examination of managements decisions
venture, the aggregate technical and commercial losses of the company showed a record decline. in sales, purchases, contracts, etc. (RTP Nov’22)
The operations of the company have improved significantly as claimed by the management of Answer 4 (a)
the company. The C&AG wants to conduct the performance audit of one of the departments of
the company through a subordinate office of Indian Audit and Accounts Department. For this
purpose, the audit programme has also been finalized and the Accountant General has intimated
the company that the audit would start within a day’s time. The company is concerned because
the programme which has been received from the Accountant General is quite detailed and
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The auditor may use the following sources for understanding the entity:
Question 1
(i) Documents of the entity: Documents on administration and functions of the entity, policy files,
The reports of the Comptroller and Auditor General of India on the audit of PSUs are presented
annual reports, budget documents, accounts, minutes of meetings, information on the website,
to the Parliament and to various state legislatures to facilitate a proper consideration. Enumerate
internal audit reports, electronic databases and MIS reports, RTI material etc.
the contents of Audit Report presented by C & AG.
(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Answer 1
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee and
To facilitate a proper consideration, the reports of the C&AG on the audit of PSUs are presented to letters from Members of Parliament.
the Parliament in several parts consisting of the following :
(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.
(a) Introduction containing a general review of the working results of Government companies,
(iv) Academic or special research: Independent evaluations on the entity, academic research and
deemed Government companies and corporations;
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board;
(v) Past audits: Past financial and performance audits of the entity provide a major source of
(c) Resume of the company auditors’ reports submitted by them under the directions issued by the information and understanding.
C&AG and that of comments on the accounts of the Government companies; and
(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board. For a transparent manner.
certain specified states, the C&AG submits a separate audit report (commercial) to the legislature,
(vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World
while for other States/Union Territories with legislature, there is a commercial chapter in the main
Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.
audit report. The State audit reports, contains both the results of audit appraisal of performance
of selected companies/corporations as well as important individual instances of financial (B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined in a
irregularities, wasteful expenditure, system deficiencies noticed by the statutory auditors, and a crisp & clear manner as they will impact the nature of the audit, govern its conduct and affect
general review of the working results of Government companies and corporations. audit conclusions. Setting audit objectives ensures good quality performance audits. It facilitates
clarity, demonstrates consistent quality of audit and serves as a measure of quality assurance of
the audit.
Question 2 Defining the scope constricts the audit to significant issues that relate to the audit objectives. It
ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance mainly focuses on the extent, timing and nature of the audit.
audit of a Sugar Industry. What factors should be considered by ABG & Co., while planning a (C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a
performance audit of Sugar Industry? program meets or exceeds expectations. It provides a context for understanding the results of
Answer 2 the audit. Audit criteria are reasonable and attainable standards of performance against which
The following steps are suggested to the auditors for planning while conducting the performance audit: economy, efficiency and effectiveness of programmes and activities can be assessed.
(A) Understanding the Entity/Programme - It is the starting point for planning individual The audit criteria may be sought to be obtained from the following sources:
performance audit. (i) procedure manuals of the entity.
Sources for Understanding the (ii) policies, standards, directives and guidelines.
Entity (iii) criteria used by the same entity or other entities in similar activities or programmes.
(iv) independent expert opinion and know how.
(v) new or established scientific knowledge and other reliable information.
Academic Special
Documents Legislative Policy Media Media (vi) general management and subject matter literature and research papers.
or special Past audits focus
of the entity documents documents coverage coverage
research groups (D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be applicable

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to all types of subjects of performance audits. Selection of approach also determine methods and Given the diverse range of subjects of performance auditing, the audit team needs to develop
means used for conducting the audit. sound understanding of the programme or entity proposed to be audited.
Some of the methods which could be used in conducting performance audits include: The audit team needs to decide at the planning stage on which aspect expertise is required.
Though, the Accountant General may use the work of an expert, he retains full responsibility for
Analysis of Use of existing the expression of opinion in the auditor’s report.
Case studies
procedures data (G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria,
audit approach, data collection etc., audit team should prepare an Audit Design Matrix. It is a
structured and highly focused approach to designing a performance audit study.
Analysis of Quantitative The ADM highlights the data collection and analysis method as well as the type and sources of
Surveys
results analysis evidence required to support audit opinion/findings.
(H) Establishing Time Table and Resources - It is significant to determine the timetable and
(i) Analysis of procedures: It involves review of the systems in place for planning, conducting,
desirable resources. Selection of appropriate audit team is the most vital component in planning
checking and monitoring the activity. This would consist of examination of documents such as
an audit. Considerations for selection of an appropriate audit team should be recorded along
financial reports, budgets, programme guidelines, procedure manuals, etc.
with the proposed timelines for various activities to be undertaken as a part of audit process. The
(ii) Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It progress should also be monitored against these timelines. The Accountant General would be
involves analysis of a particular issue within the context of the whole area under review. liable for ensuring that the performance audit is completed on time. The variations between the
(iii) Use of existing data: The audit staff should investigate the data held by entity management and required and actual time spent should be compared and approved from the competent authority.
by other relevant sources. Audit conclusions based on testing of available data for correctness The team should build time for translation, approval and possible delays in their own schedule
and completeness enhances the assurance level. in order to meet the targets.
(iv) Surveys: Survey is a method of collecting information from members of a population to assess (I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about
the interrelation of events and conditions. Surveys on predetermined parameters can supplement the intention of taking up planned performance audit with the scope and extent of audit including
the audit findings and conclusions adding value to the performance audits. the constitution of audit team and the tentative time schedule, well before the commencement of
(v) Analysis of results: It requires the auditor to carry out actual output-input analysis to determine Audit. Acknowledgement of this may be requested and placed on record.
the efficiency of the programme. It may be required to refine an audit’s objectives as the audit progresses for gathering the requisite
(vi) Quantitative analysis: It involves examination of available data relating to financials like information to fulfill the audit. The reasons for such changes in the objectives should also be
earnings, revenue, or data relating to programme implementation like details of beneficiaries recorded and approved from the competent authority.
etc. However, it may not be possible for the auditor to work with complete data due to its high The audit programme should be flexible and reviewed from time to time as it is not possible to
volume. In such cases, sampling techniques are required to be used. anticipate all the contingencies at the early stage.
(E) Developing Audit Questions - Subsequent to designing of audit objectives and determination The Accountant General should share all significant refinements in the approach and additional
of audit criteria, the audit team is required to prepare a list of questions to which they would tests and findings, concurrently with other audit teams when different persons conduct the audit
seek answers. The questions should be framed in comprehensive manner involving detailed at different locations. The system of sharing of the significant field audit experience should be
hierarchy of questions. documented and reviewed.
(F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that
the performance auditors possess special aptitude and knowledge. The Auditing Standards of
Question 3
C&AG of India provide that the audit institution should develop and train the auditors to enable
them to perform their tasks effectively & efficiently and should prepare manuals & other written Sunlight Limited is a public sector undertaking engaged in production of electricity from solar
guidance notes & instructions concerning conduct of audits. power. It had commissioned a new project near Goa with a new technology for a cost of ₹ 5,750
crore. The project had seen delay in commencement and cost overrun. State the matters that a
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Comprehensive Audit by C&AG may cover in reporting on the performance and efficiency of quantity, quality and at the best price.
this project.
(ii) Efficiency- It is the input-output ratio. In the case of public spending, efficiency is achieved when
Answer 3 the output is maximised at the minimum of inputs, or input is minimised for any given quantity
Propriety requires the transactions, and more particularly expenditure, to conform to certain general and quality of output. When the audit objective of efficiency considers outputs, focus is usually
principles. These principles are: on processes by which an organisation transforms inputs into outputs.
(i) that the expenditure is not prima facie more than the occasion demands and that every official Auditing efficiency embraces aspects such as whether:
exercises the same degree of vigilance in respect of expenditure as a person of ordinary prudence (a) sound procurement practices are followed;
would exercise in respect of his own money;
(b) resources are properly protected and maintained;
(ii) that the authority exercises its power of sanctioning expenditure to pass an order which will not
directly or indirectly accrue to its own advantage; (c) human, financial and other resources are efficiently used;
(iii) that funds are not utilised for the benefit of a particular person or group of persons and (d) optimum amount of resources (staff, equipment, and facilities) are used in producing or delivering
the appropriate quantity and quality of goods or services in a timely manner;
(iv) that, apart from the agreed remuneration or reward, no other avenue is kept open to indirectly
benefit the management personnel, employees and others. (e) public sector programmes, entities and activities are efficiently managed, regulated, organised
and executed;
It may be stated that it is the responsibility of the executive departments to enforce economy in public
expenditure. The function of audit is to bring to the notice of the proper authorities of wastefulness in (f) efficient operating procedures are used; and
public administration and cases of improper, avoidable and infructuous expenditure. (g) the objectives of public sector programmes are met cost-effectively.
The functions of Auditor in the context of Propriety Audit may be specified as under as to: (iii) Effectiveness- It is the extent to which objectives are achieved and the relationship between the
• see that all expenditure incurred are properly planned. intended impact and the actual impact of an activity.
• see that the size and channels of expenditure are rightful and expected to give maximum results. In auditing effectiveness, performance audit may, for instance:
• appraise whether those expenditure are likely to give optimum result. (h) assess whether the objectives of and the means provided (legal, financial, etc.) for a new or
ongoing public sector programme are proper, consistent, suitable or relevant to the policy;
• see that any substitute plan of action can bring about an improvement on current operation and as
well as return from capital expenditure. (i) determine the extent to which a program achieves a desired level of program results;
• examine the actions and decisions of the management to see that they are conductive to public (j) assess and establish with evidence whether the observed direct or indirect social and economic
interests and that they meet the standards of conduct. impacts of a policy are due to implementation of the policy or to other causes;
(k) identify factors inhibiting satisfactory performance or goal-fulfilment;
(l) assess whether the programme complements, duplicates, overlaps or counteracts other related
Question 4
programmes;
“A performance audit is an objective and systematic examination of evidence for the purpose
(m) assess the effectiveness of the program and/or of individual program components;
of providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public accountability (n) determine whether management has considered alternatives for carrying out the program that
and facilitate decision-making by parties with responsibility to oversee or initiate corrective might yield desired results more effectively or at a lower cost;
action.” Briefly discuss the issues addressed by Performance Audits conducted in accordance (o) assess the adequacy of the management control system for measuring, monitoring and reporting
with the guidelines issued by C&AG. a programme’s effectiveness;
Answer 4 (p) assess compliance with laws and regulations applicable to the program; and
According to the guidelines issued by the C&AG, Performance Audits usually address the issues of: (q) identify ways of making programmes work more effectively.
(i) Economy- It is minimising the cost of resources used for an activity, having regard to appropriate
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BT Ltd , a company wholly owned by central government was disinvested during the previous Comptroller & Auditor General appointed Verma & Associates, a chartered accountant firm, to
year, resulting in 40% of the shares being held by public. The shares were also listed on the BSE. conduct Performance audit of MAP Ltd., a public sector undertaking of Government of India.
Since the shares were listed, all the listing requirements were applicable, including publication The firm conducted the audit with a view to check all the expenses of the unit are in conformity
of quarterly results, submission of information to the BSE etc. with the public interest and publicly accepted customs. The audit report submitted by audit
Sam, the FM of the company is of the opinion that now the company is subject to stringent firm was rejected by C&AG. Give your opinion on the action of C&AG.
control by BSE and the markets, therefore the auditing requirements of a limited company Answer 7
in private sector under the Companies Act 2013 would be applicable to the company and the In the given scenario, C&AG appointed Verma & Associates, a chartered accountant firm, to conduct
C&AG will not have any role to play. Comment. Performance Audit of MAP Ltd., a PSU of Government of India. The firm conducted audit with a
Answer 5 view to check all the expenses of the unit are in conformity to the public interest and publicly accepted
Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in customs which is not Performance Audit.
which not less than 51% of the paid-up share capital is held by the Central Government or by any A performance audit is an objective and systematic examination of evidence for the purpose of
State Government or Governments or partly by the Central Government and partly by one or more providing an independent assessment of the performance of a government organization, program,
State Governments, and includes a company which is a subsidiary company of such a Government activity, or function in order to provide information to improve public accountability and facilitate
company. The auditors of these government companies are firms of Chartered Accountants, appointed decision-making by parties with responsibility to oversee or initiate corrective action.
by the Comptroller & Auditor General, who gives the auditor directions on the manner in which the Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
audit should be conducted by them. The listing of company’s shares on a stock exchange is irrelevant subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance
for this purpose and hence Sam’s opinion is not correct. audit, the subordinate offices are guided by manual and auditing standards prescribed by C&AG.
Therefore, the objectives of performance auditing are evaluation of economy, efficiency, and
Question 6 effectiveness of policy, Programmes, organization and management. It also promotes accountability
by assisting those charged with governance and oversight responsibilities to improve performance;
You have been appointed as auditor of a AKY Ltd. After having determined the audit objectives,
and transparency by affording taxpayers, those targeted by government policies and other stakeholders
now you have been requested to draft audit criteria. What are the sources that you will use while
an insight into the management and outcomes of different government activities.
doing the task?
Performance auditing focuses on areas in which it can add value which have the greatest potential
Answer 6
for development. It provides constructive incentives for the responsible parties to take appropriate
The audit criteria may be sought to be obtained from the following sources: action. Regulations on Audit and Accounts issued by C&AG lay down that the responsibility
(i) procedure manuals of the entity. for the development of measurable objectives and performance indicators as also the systems of
measurement rests with the Government departments or Heads of entities. They are also required to
(ii) policies, standards, directives and guidelines.
define intermediate and final outputs and outcomes in measurable and monitor able terms, standardize
(iii) criteria used by the same entity or other entities in similar activities or programmes. the unit cost of delivery and benchmark quality of outputs and outcomes.
(iv) independent expert opinion and know how. Thus, rejection of audit report (submitted by audit firm) by C&AG is in order as audit with a view to
(v) new or established scientific knowledge and other reliable information. mere check all the expenses of the unit are in conformity to the public interest and publicly accepted
(vi) general management and subject matter literature and research papers. customs done by audit firm is not performance audit in all aspects.

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Question 8 v) Past audits: Past financial and performance audits of the entity provide a major source of
The objectives of audit in connection with a State Electricity Distribution Company were to information and understanding.
ascertain whether the: vi) Media coverage: Print and electronic media - their systematic documentation on regular basis
(i) total cost of providing electricity is being recovered by timely submissions to the State in a transparent manner.
Electricity Regulatory Commission; vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World
(ii) tariff orders, sales circulars and sales instructions were issued timely, without any ambiguity. Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.
They were implemented in time; B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined in a
(iii) metering, billing and collection was managed efficiently and effectively; crisp & clear manner as they will impact the nature of the audit, govern its conduct and affect audit
conclusions. Setting audit objectives ensures good quality performance audits. It facilitates clarity,
(iv)monitoring and internal controls were efficient.
demonstrates consistent quality of audit and serves as a measure of quality assurance of the audit.
What kind of audit is referred in the above scenario? Also briefly discuss the steps suggested to
Defining the scope constricts the audit to significant issues that relate to the audit objectives. It
the auditors for planning such an audit.
mainly focuses on the extent, timing and nature of the audit.
Answer 8
C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a
In the given scenario, in view of the objectives discussed, performance audit is being referred. program meets or exceeds expectations. It provides a context for understanding the results of
The following steps are suggested to the auditors for planning while conducting the performance the audit. Audit criteria are reasonable and attainable standards of performance against which
audit: economy, efficiency and effectiveness of programmers and activities can be assessed.
A) Understanding the Entity/Programme - It is the starting point for planning individual performance The audit criteria may be sought to be obtained from the following sources:
audit. i) procedure manuals of the entity.
The auditor may use the following sources for understanding the entity: ii) policies, standards, directives and guidelines.
iii) criteria used by the same entity or other entities in similar activities or programmes.
Sources for Understanding the
Entity iv) independent expert opinion and know how.
v) new or established scientific knowledge and other reliable information.
vi) general management and subject matter literature and research papers.
Academic Special
Documents Legislative Policy Media Media D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be applicable
or special Past audits focus
of the entity documents documents coverage coverage to all types of subjects of performance audits. Selection of approach also determine methods and
research groups
means used for conducting the audit.
i) Documents of the entity: Documents on administration and functions of the entity, policy files, Some of the methods which could be used in conducting performance audits include:
annual reports, budget documents, accounts, minutes of meetings, information on the website,
internal audit reports, electronic databases and MIS reports, RTI material etc. Analysis of Use of existing
Case studies
procedures data
ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee and
letters from Members of Parliament.
Analysis of Quantitative
iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc. Surveys
results analysis
iv) Academic or special research: Independent evaluations on the entity, academic research and

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i) Analysis of procedures: It involves review of the systems in place for planning, conducting, H) Establishing Time Table and Resources - It is significant to determine the timetable and desirable
checking and monitoring the activity. This would consist of examination of documents such as resources. Selection of appropriate audit team is the most vital component in planning an audit.
financial reports, budgets, programme guidelines, procedure manuals, etc. Considerations for selection of an appropriate audit team should be recorded along with the
ii) Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It proposed timelines for various activities to be undertaken as a part of audit process. The progress
involves analysis of a particular issue within the context of the whole area under review. should also be monitored against these timelines. The Accountant General would be liable for
iii) Use of existing data: The audit staff should investigate the data held by entity management and ensuring that the performance audit is completed on time. The variations between the required
by other relevant sources. Audit conclusions based on testing of available data for correctness and actual time spent should be compared and approved from the competent authority.
and completeness enhances the assurance level. The team should build time for translation, approval and possible delays in their own schedule
iv) Surveys: Survey is a method of collecting information from members of a population to assess in order to meet the targets.
the interrelation of events and conditions. Surveys on predetermined parameters can supplement I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about
the audit findings and conclusions adding value to the performance audits. the intention of taking up planned performance audit with the scope and extent of audit including
v) Analysis of results: It requires the auditor to carry out actual output-input analysis to determine the constitution of audit team and the tentative time schedule, well before the commencement of
the efficiency of the programme. Audit. Acknowledgement of this may be requested and placed on record.
vi) Quantitative analysis: It involves examination of available data relating to financials like It may be required to refine an audit’s objectives as the audit progresses for gathering the requisite
earnings, revenue, or data relating to programme implementation like details of beneficiaries information to fulfill the audit. The reasons for such changes in the objectives should also be
etc. However, it may not be possible for the auditor to work with complete data due to its high recorded and approved from the competent authority.
volume. In such cases, sampling techniques are required to be used. The audit programme should be flexible and reviewed from time to time as it is not possible to
E) Developing Audit Questions - Subsequent to designing of audit objectives and determination anticipate all the contingencies at the early stage.
of audit criteria, the audit team is required to prepare a list of questions to which they would The Accountant General should share all significant refinements in the approach and additional
seek answers. The questions should be framed in comprehensive manner involving detailed tests and findings, concurrently with other audit teams when different persons conduct the audit
hierarchy of questions. at different locations. The system of sharing of the significant field audit experience should be
F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that documented and reviewed.
the performance auditors possess special aptitude and knowledge. The Auditing Standards of
C&AG of India provide that the audit institution should develop and train the auditors to enable
Question 9
them to perform their tasks effectively & efficiently and should prepare manuals & other written
guidance notes & instructions concerning conduct of audits. PGC & Associates are statutory auditors of BNPC Limited, a PSU in power sector. It is engaged
in building large sized thermal power stations to accelerate development of power sector in
Given the diverse range of subjects of performance auditing, the audit team needs to develop
the country. One of the financial committees of Parliament has decided to examine its physical
sound understanding of the programme or entity proposed to be audited.
and financial performance. It has also examined audit findings of C&AG in respect of which
The audit team needs to decide at the planning stage on which aspect expertise is required. action is yet to be taken by the said PSU. The committee also proposes to include in its report
Though, the Accountant General may use the work of an expert, he retains full responsibility for performance of the company in various operational matters.
the expression of opinion in the auditor’s report.
Which financial committee of Parliament deals with such matters? Outline its main functions.
G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria,
Answer 9
audit approach, data collection etc., audit team should prepare an Audit Design Matrix. It is a
structured and highly focused approach to designing a performance audit study. The said matters are dealt by Committee on Public Undertakings (COPU). The functions of the
Committee are -
The ADM highlights the data collection and analysis method as well as the type and sources of
evidence required to support audit opinion/findings. (i) to examine the reports and accounts of public undertakings.
(ii) to examine the reports of the C&AG on public undertakings.

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(iii) to examine the autonomy and efficiency of public undertakings and to see whether they are being that unless they have understood scope of duties of C&AG, they would not be in a position to do
managed in accordance with sound business principles and prudent commercial practices. justice to audits and professional work in this area.
(iv) to exercise such other functions vested in the PAC and the Estimates Committee as are not In the process, they have gone through various materials both offline and online. The summarized
covered above and as may be allotted by the Speaker from time to time. information derived from some of such materials including website of C&AG are stated below:
The examination of public enterprises by the Committee takes the form of comprehensive appraisal A. The C&AG report for a particular year contained results of the compliance audit of
or evaluation of performance of the undertaking. It involves a thorough examination, including Department of Revenue-Direct Taxes of the Union Government dealing with “Assessments
evaluation of the policies, Programmes and financial working of the undertaking. relating to Agricultural Income”. It included certain observations relating to allowing of
claim for exemption of agricultural income without supporting documents, use of this area
by non-agriculturists as a conduit to avoid taxes etc., in scrutiny assessments performed by
Question 10 the Department.
PS & Associates are statutory auditors of a Central government owned company for a particular B. The C&AG in one of its reports in respect of a state government owned industrial development
year. The statutory auditors were required to examine the following areas mandatorily, provide corporation pointed out non-adherence of One-time settlement (OTS) guidelines of state
their specific replies and also their impact on financial statements for that particular year in government by the corporation resulting in acceptance of a below par OTS proposal thus
their audit report. foregoing recovery of loan amounting to ` 6.87 crores. The said corporation was providing
1) Whether the company has system in place to process all the accounting transactions through loans to industrial units.
IT system? If yes, the implications of processing of accounting transactions outside IT system C. Annual report of a listed public sector company which is a “mini-ratna” PSU was also gone
on the integrity of the accounts along with the financial implications, if any, may be stated. through. The said company is engaged in providing diversified services to Indian Railways.
2) Whether there is any restructuring of an existing loan or cases of waiver / write off of debts / D. A state government owned PSU was involved in setting up of a thermal power plant in the
loans/ interest etc. made by a lender to the company due to the company’s inability to repay the state. The C&AG, in its audit report, pointed out delay in completion of work due to failure
loan? If yes, the financial impact may be stated. Whether such cases are properly accounted for? to decide on the type of water treatment in the cooling plant on a timely basis. Besides,
3) Whether funds (grants/subsidy etc.) received / receivable for specific schemes from Central other reasons leading to delay like frequent changes in lay-out and re-testing of soil by the
government or its agencies were properly accounted for / utilized as per its term and company were pointed out Answer the following questions based upon above information:
conditions? List the cases of deviation.
Can you gauge likely nature of such responsibility thrust upon auditors of above PSU? 1. Based on description provided at para [A] of case, which Parliamentary financial committee
Answer 10 is likely to examine above report of C&AG and make its recommendations?
The above areas for which statutory auditors of PSU were required to examine, report and indicate a) Estimates Committee.
impact of these matters in financial statements are likely to relate to directions issued by C&AG to b) Public Accounts Committee.
statutory auditors under section 143(5) of Companies Act, 2013.
c) Committee on Public Undertakings.
In terms of section 143(5), in case of a government company, the C&AG has the power to direct the
d) Committee on Commerce.
auditor the manners in which accounts of company are required to be audited and auditor shall submit
audit report which among other things, include the directions, if any, issued by the C&AG the action Ans: (b)
taken thereon and its impact on the accounts and financial statements of the company.
2. Considering the description stated in para [B] of case, the above audit finding is likely to fall
Integrated Case Scenario in which areas?
SRM & Associates are refreshing up their knowledge on functions of various Parliamentary a) Compliance audit.
financial committees and on the varied functions and duties of Comptroller & Auditor General b) Performance audit.
of India in relation to audit of government institutions and government companies. They feel
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c) Propriety audit.
d) Comprehensive audit
Ans: (a)
3. As regards listed PSU described in para [C] of case, which of the following statements is most
appropriate?
a) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by shareholders
in AGM. C&AG cannot give directions to such firm of auditors. However, its office is empowered
to conduct a supplementary audit.
b) The statutory audit of above PSU is to be conducted by C&AG.
c) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by C&AG.
Further, C&AG can give directions to the firm of auditors.
d) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by shareholders
in AGM. However, C&AG can give directions to the firm of auditors
Ans: (c)
4. Considering nature of audit finding described at para [D] of case concerning delay in
completion of work of thermal power plant, the said audit finding is likely to fall in domain of:
a) Propriety audit.
b) Performance audit.
c) Financial audit.
d) Compliance audit.
Ans: (b)
5. PSU engagements are generally attestation engagements or direct reporting engagements.

Which of the following statements is correct in this regard?
a) Performance audits and compliance audits are generally attestation engagements.
b) Performance audits and compliance audits are generally direct reporting engagements.
c) Performance audit is a direct reporting engagement whereas compliance audit is an attestation
engagement.
d) Performance audit is an attestation engagement whereas compliance audit is a direct reporting
engagement.
Ans: (b)

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AUDIT OF PUBLIC SECTOR UNDERTAKINGS
CA Harshad Jaju
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16
CHAPTER
INTERNAL
AUDIT
Question 1
ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic
as well as in International Market. It has achieved turnover of 200 crores in the F.Y. 2016 -17.
Directors of the company realized that they are not managing the company professionally and
thereby request your firm of Internal Auditors for appraisal of its organizational structure
to ascertain whether it is in harmony with the objectives of ABC (P) Ltd. Comment. (MTP 4
Marks, Aug ’18, PYP 4 Marks , Nov ’18)
Answer 1
Review of the Organization Structure - The internal auditor should conduct an appraisal of the
organization structure to ascertain whether it is in harmony with the objectives of the enterprise and
whether the assignment of responsibilities is in consonance therewith. For this purpose:
• He should review the manner in which the activities of the enterprise are grouped for managerial
control. It is also important to review whether responsibility and authority are in harmony with the
grouping pattern.
• The internal auditor should examine the organization chart to find out whether the structure is
simple and economical and that no function enjoys an undue dominance over the others.
• He should particularly see that the responsibilities of managerial staff at headquarters do not
overlap with those of chief executives at operating units. He should examine whether there is a
satisfactory balance between authority and responsibility of important executives.
• The internal auditor should examine the reasonableness of the span of control of each executive
(the number of sub-ordinates that an executive controls). He should examine whether there is a
unity of command i.e., whether each person reports only to one superior.
• Where dual responsibilities cannot be avoided, the primary one should be specified and the specific
responsibility to each senior fixed. This must be made known to all concerned.
Finally, he should evaluate the process of managerial development in the enterprise. This is a vital
aspect in a fast growing enterprise
CA Harshad Jaju
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INTERNAL AUDIT INTERNAL AUDIT
Question 2 Answer 3
You have been appointed as an internal auditor of a company RSM Ltd. The Managing Director Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013, following
Rakesh is worried about employee attrition in large number. Rakesh requests you to analyse the class of companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014) shall be required to
causes for high employee attrition rate in his company. What factors would you consider in such appoint an internal auditor or a firm of internal auditors, namely:-
analysis? (MTP 4 Marks, May ’20, Old SM) (A) every listed company;
OR (B) every unlisted public company having-
The Managing Director of X Ltd is concerned about high employee attrition rate in his company. (1) paid up share capital of fifty crore rupees or more during the preceding financial year; or
As the internal auditor of the company he requests you to analyze the causes for the same. What
(2) turnover of two hundred crore rupees or more during the preceding financial year; or
factors would you consider in such analysis? (New SM)
(3) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
Answer 2
crore rupees or more at any point of time during the preceding financial year; or
The factors responsible for high employee attrition rate are as under:
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding
a) Job Stress & work life imbalance; financial year; and
b) Wrong policies of the Management; (C) every private company having-
c) Unbearable behavior of Senior Staff; (1) turnover of two hundred crore rupees or more during the preceding financial year; or
d) Safety factors; (2) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
e) Limited opportunities for promotion; crore rupees or more at any point of time during the preceding financial year.
f) Low monetary benefits; In the given case, Munch Ltd. is a public company. The company borrowed a loan from a public
g) Lack of Labour welfare schemes; financial institution of Rs. 110 crores during the previous year. At the year end, the loan outstanding
after being squared up is Rs. 90 crores (Rs. 110 crores - Rs. 20 crores) which is less than the minimum
h) Whether the organization has properly qualified and experienced personnel for the various levels
prescribed limit of Rs. 100 crores for applicability of internal audit. Although, the outstanding loan at
of works?
previous year end is Rs. 90, it was Rs. 110 crores at some point of time which is the requirement of
i) Is the number of people employed at various work centers excessive or inadequate? the section (refer Rule 13(B)(3) as mentioned above).
j) Does the organization provide facilities for staff training so that employees and workers keep Hence, Munch Ltd. has the statutory liability to appoint an Internal Auditor and mandatorily conduct
themselves abreast of current techniques and practices? internal audit. Consequently, the contention of the management of the company is not tenable.
Munch Ltd. is a public company having Rs. 40 lacs paid up capital in previous financial year XYZ Yarns Ltd. is a manufacturing company engaged in manufacturing of different types of
which raised to Rs. 60 lacs in current financial year under audit. The company had turnover of yarns. Its annual turnover is Rs. 100 Crores and net profit Rs. 10 crores. It has two manufacturing
previous three consecutive financial years being Rs. 49 crores, Rs. 145 crores and Rs. 150 crores. units. Company is facing difficulties in maintaining adequate system of internal control.
During the previous year, Munch Ltd. borrowed a loan from a public financial institution of Company wants to appoint Internal Auditor who would help in the above task and also various
Rs. 110 crores but squared up Rs. 20 crores by the year end. The company does not have any other functions including compliance.
internal audit system. In view of the management, internal audit system is not mandatory.
In view of above, you are required to explain the main responsibility of Internal Auditors. (MTP
You are required to state the provisions related to applicability of internal audit as per the 4 Marks, Oct 18)
Companies Act, 2013 and comment upon the contention of the management of the company.
(MTP 4 Marks, April 18, RTP May 22)

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Answer 4 The company was fully financed through its own capital during both years. Kindly assess
Main responsibility of internal auditor must be : whether the company was required to appoint internal auditor as per section 138 read with Rule
13 of the Companies (Accounts) Rules, 2014 for FY 2021-22. (MTP 4 Marks Oct ‘22)
to maintain adequate system of internal control by a continuous examination of accounting procedures,
receipts and disbursements and to provide adequate safeguards against misappropriation of assets. Answer 5
to operate independently of the accounting staff and must not in any way divest himself of any of the As per section 138 of the Companies Act, 2013, such class or classes of companies as may be prescribed
responsibilities placed upon him. shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to conduct an internal audit of
Not to involve himself in the performance of executive functions in order that his objective outlook
the functions and activities of the company.
does not get obscured by the creation of vested interest.
As per Rule 13 of the Companies (Accounts) Rules, 2014, the following class of companies shall be
to observe facts and situations and bring them to notice of authorities who would otherwise never
required to appoint an internal auditor which may be either an individual or a partnership firm or a
know them; also, they critically appraise various policies of the management and draw its attention
body corporate, namely:
to any deficiencies, wherever these require to be corrected. to associate closely with management and
his knowledge must be kept up to date by his being kept informed about all important occurrences • every listed company.
and events affecting the business, as well as the changes that are made in business policies. He must • every unlisted public company having
enjoy an independent status. o paid up share capital of fifty crore rupees or more during the preceding financial year; or
In addition, the Audit Committee of the company or the Board shall, in consultation with the Internal o turnover of two hundred crore rupees or more during the preceding financial year; or
Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal
o outstanding loans or borrowings from banks or public financial institutions exceeding one
audit.
hundred crore rupees or more at any point of time during the preceding financial year; or
It may also be noted that the Central Government may, by rules, prescribe the manner and the intervals
o outstanding deposits of twenty-five crore rupees or more at any point of time during the
in which the internal audit shall be conducted and reported to the Board.
preceding financial year; and
• every private company having
Question 5
o turnover of two hundred crore rupees or more during the preceding financial year; or
ABC Pvt Ltd was involved in the business of manufacturing pipes and holdings. For financial
o outstanding loans or borrowings from banks or public financial institutions exceeding one
year 2020-21 the company had the following turnover from its various segments and product:
hundred crore rupees or more at any point time during the preceding financial year:
Segment Name Turnover Profit
In the current scenario, the company is a private limited company with having turnover of ₹ 230 Crore
Steel / Iron Pipe Manufacturing 140 Crore 10 Crore in FY 2020-21 and ₹ 110 Crore in FY 2021-22. As per Rule 13, every private company with a turnover
Holdings and Civil Structure Accessories 25 Crore 50 Lakh of two hundred crore rupees or more during the preceding financial year must appoint an internal
PVC / Yellow Pipe Manufacturing 65 Crore 8 Crore auditor who may be either an individual, a partnership firm or a body corporate. Hence, ABC Pvt Ltd
During Financial Year 2021-22, the company’s performance was considerably lower compared is required to appoint Internal Audit for FY 2021 -22.
to FY 2020-21 due to competition and high prices. Turnover and Profit of the company for FY
2021-22 is given hereunder:
Question 6
Segment Name Turnover Profit
One of the independent directors sought information regarding the appointment of internal
Steel / Iron Pipe Manufacturing 60 Crore 2 Crore auditors for following Group Companies in accordance with the Companies Act, 2013 of which
Holdings and Civil Structure Accessories 15 Crore 35 Lakh certain Financial Information are given below:
PVC / Yellow Pipe Manufacturing 35 Crore 3 Crore
Figures are in ` crore and correspond to the previous year.

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Equity Share Loan from Public It can be concluded that AADI Ltd. and AJIT Ltd. is required to appoint the internal auditor as per the
Name Nature Turnover provisions of the Companies Act, 2013 whereas NEMI Ltd. is not required to do the same.
Capital Bank and PFI Deposits
AADI Ltd. Listed 100 190 50 24
Unlisted Question 7
AJIT Ltd. 60 190 50 24
Public
Consider the following statement:
Unlisted
NEMI Ltd. 60 190 50 -
Private “The internal auditor of a company shall be free from any undue influences which force him to
deviate from the truth. He shall be independent.”
You are required to evaluate the requirements of the Companies Act, 2013 regarding the
appointment of internal Auditors for the Group Companies. Discuss. (MTP 4 Marks Sep ’23) Is above statement proper? If so, how independence of internal auditor can be established?
(MTP 4 Marks Oct’23)
Answer 6
Answer 7
Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013,
following class of companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014) shall be The Internal Auditor shall be free from any undue influences which force him to deviate from the
required to appoint an internal auditor or a firm of internal auditors, namely:- truth.
(A) every listed company; This independence shall be not only in mind but also in appearance. Also, the internal auditor shall
resist any undue pressure or interference in establishing the scope of the assignments or the manner in
(B) every unlisted public company having-
which these are conducted and reported, in case these deviate from set objectives. The independence
(1) paid up share capital of fifty crore rupees or more during the preceding financial year; or of the internal audit function and the Internal Auditor within the organization is a vital aspect of
(2) turnover of two hundred crore rupees or more during the preceding financial year; or maintaining effective corporate governance. It is important to ensure that the internal audit function is
(3) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred free from any undue influence or pressure that may affect its ability to provide impartial and objective
crore rupees or more at any point of time during the preceding financial year; or assessments of the organization’s operations, risks, and controls.
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding Therefore, the given statement is proper.
financial year; and To establish the independence of the Internal auditor, several factors need to be considered. Firstly, the
(C) every private company having- overall organizational structure of key personnel plays a crucial role. The Internal auditor should be
positioned in a way that allows them to operate independently and objectively. This includes having
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
direct access to the Audit Committee, Board of Directors, and other senior executives. Secondly, the
(2) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred reporting line of the Chief Internal Auditor is an important consideration. The Chief Internal Auditor
crore rupees or more at any point of time during the preceding financial year. should report to the highest level of authority within the organization, such as the CEO or the Board
In the given case, AADI Ltd. is a listed company. As per section 138 of the Companies Act, 2013, of Directors. This ensures that the Internal auditor has the necessary authority and support to carry
every listed company is required to appoint an internal auditor or a firm of internal auditors. Thus, in out their responsibilities effectively. Finally, the powers and authority derived from superiors further
view of the above, AADI Ltd. is required to appoint an internal auditor. establish the independence of the Internal auditor. The Internal auditor should have the necessary
resources, budget, and support to conduct their work without any undue influence or pressure from
Further, AJIT Ltd. is unlisted public company. The company is having ` 60 crore as equity share
senior executives or other stakeholders.
capital which is exceeding the prescribed limit of rupees fifty crore as per section 138. Thus, AJIT Ltd.
is required to appoint an internal auditor as per section 138 of the Companies Act, 2013.
NEMI Ltd. is unlisted private company and having ` 60 crore as equity share capital, ` 190 crore Question 8
as turnover and ` 50 crore loan from Bank and PFI. In view of provisions of section 138 of the Mr. Anand is appointed as statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint internal
Companies Act, 2013 discussed above, all the limits are below the prescribed limit for a private auditor as per statutory provisions given in the Companies Act, 2013 and appointed Mr. Bhola
company. Therefore, NEMI Ltd. is not required to appoint an internal auditor. as its internal auditor.

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The external auditor Mr. Anand asked internal auditor to provide direct assistance to him regarding Question 9
evaluating significant accounting estimates by the management and assessing the risk of material A professional accountant in public practice is always subject to various threats incompliance
misstatements. with fundamental principles of his profession and you, as a professional accountant, are
(a) Discuss whether Mr. Anand, statutory auditor, can ask direct assistance from Mr. Bhola, internal worried about engagement specific threat in your audit assignment of M/s Soft Ltd. and want
auditor as stated above in view of Standards on Auditing. (MTP 4 Marks, April 21, RTP May 18) to implement some measures to eliminate and reduce the same. Enumerate some engagement
(b) Will your answer be different, if Mr. Anand ask direct assistance from Mr. Bhola, internal auditor specific safeguards which you may introduce in your work environment toward off such threats.
with respect to external confirmation requests and evaluation of the results of external confirmation (PYP 5 Marks, May ‘19)
procedures? (RTP May 20, Old & New SM) Answer 9
Answer 8 Engagement-specific safeguards in the work environment may include:
(a) Direct Assistance from Internal Auditor: As per SA 610 “Using the Work of Internal Auditor”, (i) Involving an additional professional accountant to review the work done or otherwise advise as
the external auditor shall not use internal auditors to provide direct assistance to perform necessary.
procedures that Involve making significant judgments in the audit. (ii) Consulting an independent third party, such as a committee of independent directors, a professional
Since the external auditor has sole responsibility for the audit opinion expressed, the external auditor regulatory body or another professional accountant.
needs to make the significant judgments in the audit engagement. (iii) Discussing ethical issues with those charged with governance of the client.
Significant judgments include the following: (iv) Disclosing to those charged with governance of the client the nature of services provided and
• Assessing the risks of material misstatement; extent of fees charged.
• Evaluating the sufficiency of tests performed; (v) Involving another firm to perform or re-perform part of the engagement.
• Evaluating the appropriateness of management’s use of the going concern assumption; (vi) Rotating senior assurance team personnel.
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters affecting the
auditor’s report.
In view of above, Mr. Anand cannot ask direct assistance from internal auditors regarding evaluating
significant accounting estimates and assessing the risk of material misstatements.
(b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures: SA
610 “Using the Work of Internal Auditor”, provide relevant guidance in determining the nature
and extent of work that may be assigned to internal auditors. In determining the nature of work
that may be assigned to internal auditors, the external auditor is careful to limit such work to those
areas that would be appropriate to be assigned. Further, in accordance with SA 505, “External
Confirmation” the external auditor is required to maintain control over external confirmation
requests and evaluate the results of external confirmation procedures, it would not be appropriate
to assign these responsibilities to internal auditors.
However, internal auditors may assist in assembling information necessary for the external auditor to
resolve exceptions in confirmation responses.

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Multiple Choice Questions (MCQs) Question 4

Question 1 An educational institute was collecting fees from their students by cash/ cheque / draft and
through net banking. Institute follows the policy to account for the fees received in the year
Prakash Limited has around 25 branch offices and all the branch offices were on company’s own
of receipt only and for the cheques or drafts received but not deposited in bank or credited in
land and building. Company has the Policy that all the original title deeds for land and building
bank account, should be shown in reconciliation statement. The internal auditor of branches
owned by the company will be kept in the custody of authorised official at company’s head office
noticed that at some branches only the fees received up to 25th March are accounted for in the
and a certified copy of the same is kept with the respective branch for verification. You have been
same year and the receipts after that date are carried forward to be accounted for in the next
appointed as the internal auditor for the branches of the company and during the course of audit
financial year. The fees collected in these branches between 25th to 31st March amounted to Rs.
you observed that the orig inal title deeds of some of the branch office are kept in the branch under
15 lakhs for the year 2017-18 and the collection for the financial year ended 31st March 2018
the custody of branch officials itself. What action will you take in such case?
amounted to Rs. 115 crores. The auditor was of the view that it will not give a true and fair view
(a) It is not a material discrepancy, so the auditor is not required to take any action in such case. on institute’s revenue for the year. What do you think should be the next step of the auditor?
(b) The auditor should inform the internal auditor of the Head Office for the compliance of the same. (a) The branches have accounted for those receipts in the next financial year so the auditor can ignore
(c) The auditor should ask the branch office/official to send original title deed to the authorised the observation.
official at Head Office of the company immediately and submit the Internal Audit Report once the (b) Auditor should report the matter in Executive Summary paragraph and highlight it as significant
confirmation received from Head office of company. internal control lapse.
(d) As an internal auditor, report the matter in the Internal Audit Report and check for the compliance (c) Internal auditor can discuss the matter with the management to take a strict action against the
of the same in the next audit period (MTP 1 Mark ,Mar 19) branches not following institute’s policy.
Answer 1 (d) (d) Auditor should get the accounts modified and report the matter in action taken report. (MTP 2
Marks, Mar 19)
Question 2 Answer 4 : (d)
Management of HFC Ltd. noticed a sudden increase in expense under the head “wages &
salaries” for the year 2015-16 and 2016-17. The management felt a need to get the management Question 5
audit done in order to identify the reason for the sudden increase. Mr. Arsh Gupta, Chartered
AFM coaching institute was accepting fees from its students in cash or cheque or online transfer
Accountant was appointed as management auditor by the company on 15th April 2017. What
for an amount up to Rs.10000/-, and if the amount of fees is above Rs.10000/- by cheque or
areas do you think the auditor need to verify for the purpose?
online transfer only.
(a) Check the payroll sheet prepared as per approved pay and allowances; verify the overtime
In the year 2017 the institute’s total fees collection was of Rs.82 crores. Your firm has been
sanctioned and authorised; and verify the payment process followed by the company for the
appointed the internal auditor by the Institute and during the verification of vouchers for fee
payment of wages & salaries to employees.
receipts you noticed that cash receipts of approximately Rs.5 lakhs were directly credited in
(b) Overtime authorised and the payment done to employees are the main areas need to be verified by bank account instead of routing through cash account. Management explained that since the
the auditor. deposit slips used for fees received in cash or cheque are same, the accountant has erroneously
(c) Auditor should first understand the HR Policy of the company. Then verify all the authorised shown them in the bank account but he has always tallied the cash at day end and those cash
vouchers for overtime payments done during the year; verify the payroll preparation and reconcile receipts were deposited in the bank account same day. Whether the auditor will consider the
the gross pay in terms of increments/ promotions & resignations; verify the appointments made discrepancy as material for audit report?
during the year as per HR Policy and payments made to agencies providing contractual staff. (a) The auditor should disclose the fact with his comment in the audit report as it is material for giving
(d) Auditor need to verify the new appointments i.e. of company’s payroll or outsourced staff and the a true and fair view on financial statements.
overtime allowance paid to employees. (MTP 2 Marks , Mar 19) (b) It is not a material discrepancy as the total receipts amount will remain the same and the fees
Answer 3 (c) collected in cash are deposited in bank account only.
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(c) The auditor should verify that whether such cash receipts reflects in bank statement on the same (c) A Financial Due Diligence is required to be done as no fraud has been reported and the management
day and cash ledger reconciles with the cash book on the respective dates or not. If it is followed just want to analyse the books of accounts and other financial matters pertaining to financial
then auditor can include the matter in observation paragraph with his comments else disclose the matters at site.
matter as major internal control lapse. (d) A management audit should be done to ensure that the increase in cost of construction is not due
(d) Auditor can ask the management to give a representation letter in writing. (MTP 2 Marks , Mar 19) to any discrepancies in the formulation of objectives, plans and policies of the top management.
Answer 5 (c) Answer 7 (c)
What is the difference between management audit and operational audit? Raja ram is appointed as internal auditor for a finance company with 15 branches across the
(a) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’, states. He needs to conduct a branch visit in the coming week. Based on management inputs and
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit of Management’. past year audit reports, he has shortlisted four branches. (MTP 2 Marks, April 19)
(b) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit for Management’, Rajaram is not able to decide which branch visit he should prioritize as an internal auditor.
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’. Based on the branch information given below, which branch should Rajaram visit first?
(c) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’, (a) Sonpur – 15 people; two instances of fraud in the last year; regional manager present in the branch
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for for supervision
Management’. (b) Chandpur – 12 people; no fraud, no visit by internal auditor in last two years due to set processes
(d) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’, (c) Rampur – 18 people; no fraud, 6 of 20 employees are new joiners in the last 6 months; newly
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit for Management’. opened branch
(MTP 1 Marks, May’ 20, Nov’21) (d) Laxmanpur–10 people; 1 fraud in the last year, all 10 are long term employees of the company; no
Answer 6 (c). audit visit in the last year
Answer 8 (d)
Question 7
Yellow Steels Ltd. was engaged in the business of manufacturing and selling steel products. Question 9
The company was having sales offices at different locations in and outside India. The company The firm from which you are pursuing your articleship training is the internal auditor of
decided to have a sales office at Kanpur on their own land. A Managing Committee of some Shanti Ltd. While conducting the audit of the medical expense reimbursements of the company
officers from the company was formed in order to get a building constructed at land in Kanpur. employees, you come across some bills which are clearly not medical in nature, and some others
Budget of Rs.35 crores was approved by the company for the same and it was proposed to which have been overwritten.
complete the construction within two years. Rs. 32 crores were already released by the company
During the discussions, the accountant points out that the employee is a functional head who
within a year of start of the project and the managing committee raised a demand for Rs. 5 crores
enjoys a significantly higher medical expense reimbursement limit, and that you should ignore
for further payments to vendors. The management of Yellow Steels wants to get the verification
those bills as the amount is not material. You will:
done of all the expenses incurred on site and identify the reasons for increase in construction
cost. Which of the following will suffice the purpose of management? (MTP 2 Marks, April 19) (a) Accept the explanation and the bills.
(a) The management should go for operational audit, as it will evaluate the effectiveness, efficiency (b) Recommend that the claim should be reduced, and clear guidelines should be issued to all
and economy of operations done at the construction site. employees on the matter, with a provision for disciplinary action.
(b) The management should get a Forensic Audit done in order to rule out any possibility of fraud or (c) Recommend that the employee be asked to submit fresh bills to avail the tax benefit.
any other financial crime.
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(d) Recommend that the employee be taxed on the aggregate amount of the suspect bills . (MTP 1 b) The controls over the cash process should be reported operating as test checks are being performed
Mark Oct 21, Mar’21) by officers on a quarterly basis.
Answer 9 (b) c) This control should be reported as non-operating because segregation of duties was not present
with respect to the processing of payment transactions by the cashier.
d) This control should be reported as non-operating as the manager of the branch should have at least
Question 10
2 officers for test checks of cash transactions and for cash process. (MTP 1 Mark Sep ‘22)
Employees of Star Ltd. have to travel frequently for business purposes, so the company entered
Answer 11 : (c)
into a contract with a Sudarshan Travels Ltd. for managing booking, cancellation and other
services required by their employees. As per contract terms, Sudarshan travels has to raise its
monthly bills for the tickets booked or cancelled during the period and the same are paid by Question 12
Star Ltd. within 15 days of the bill date.
M/s ABC & Co., Chartered Accountants have been approached by PQR Ltd., a company engaged
The bills raised by Sudarshan travels were of huge amount, so the management of Star Ltd. in iron and steel manufacturing industry. The company has been facing following operational
decided to get an audit conducted of the process followed for booking/ cancellation of tickets and issues:
verify the accuracy of bills raised by the travel agency. Which audit do you feel the management
(1) Penal interest for delayed payments to the overseas vendors despite having enough cash
should opt for?
flows; and
(a) Internal audit, as it relates to examine the operational efficiency of the organisation.
(2) Despite having regular production and enough inventory, delays in shipping the final goods
(b) Management audit, as it is an audit desired by the management. to the customers leading to its deteriorating vendor rating.
(c) Performance audit so as to assess the performance of the Sudarshan travels appointed by the As a partner of M/s ABC & Co., through detailed discussion with the Senior Manager of PQR
organisation. Ltd., you have concluded that all these delays are because of long decision-making cycles in the
(d) Operational audit, as it is the audit for the management and involves verifying the effectiveness, company. The company approaches you to advise the type of audit it should get done:
efficiency and economy of operations done by the Sudarshan travels for the organisation. (MTP 1 (a) Internal audit.
Mark March 22, Oct’22, MTP 2 Marks Oct’19)
(b) Management audit.
Answer 10 : (d)
(c) Operational audit.
(d) Audit is not required. (MTP 1 Mark April ’23)
Question 11
Answer 12 (b)
A branch of ABC Bank was having three staff i.e., one cashier, one officer and one manager.
The cashier was responsible for the signing of cash slips, passing entries for cash withdrawals
and providing cash to customers. You as a Bank’s branch Auditor decided to verify the cash Question 13
withdrawal transaction s and after testing you decided to pass the control over the cash process. KJ Private Ltd has a business of pharmaceuticals and has an annual turnover of INR 1,500
Also, there were no observations identified during the testing. Moreover, as the process is present crores. During the last few years, considering the environment in which the company operates,
in the branch, work performed by the cashier is not monitored on daily basis. However, on a its profit has reduced and is still falling. Hence the management has been looking at various
quarterly basis, certain test checks are performed by an officer of the branch. Internal Audit ways to cut the costs.
team reported the said controls over process as operating. You are required to guide whether
AD & Associates are the statutory auditors of the company and RM & Associates are the internal
reporting of the said controls by Internal Audit Team is correct or not
auditors of the company.
a) The controls over the cash process should be reported as operating because no issues were
Initially the company did not want to appoint any internal auditors to save costs, however, at
identified during the testing of controls.
insistence of the statutory auditors, the company appointed the internal auditors.

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During the course of the statutory audit for the financial year ended 31 March, 2019, the Question 1
statutory auditors requested for the detailed working papers of the internal auditors which the Write a short note on Internal Audit Report.
internal auditors refused. However, the statutory auditors told the management if the same are
Answer 1
not provided then they would qualify their report.
The internal auditor should carefully review and assess the conclusions drawn from the audit evidence
In this situation, please advise which of the following would be correct.
obtained, as the basis for his findings contained in his report and suggest remedial action. However,
(a) The statutory auditors should review the detailed working papers but they cannot qualify their in case the internal auditor comes across any actual or suspected fraud or any other misappropriation
report on this ground. of assets, it would be more appropriate for him to bring the same immediately to the attention of the
(b) The statutory auditors may review the detailed working papers and even after that they may management.
qualify their report. As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of internal audit
(c) The statutory auditors are not required to go to the extent of review of detailed working papers of results is generally undertaken in two stages:
internal auditors. 1. At the end of a particular audit assignment, an “Internal Audit Report” covering a specific area,
(d) The statutory auditors may review the detailed working papers of internal auditors but for that function or part of the entity is prepared by the Internal Auditor highlighting key observations
purpose they would require prior approval of the ICAI. (MTP 2 Marks, Oct’19) arising from those assignments. This report is generally issued with details of the manner in which
the assignment was conducted and the key findings from the audit procedures undertaken. This
Answer 13 : (c)
report is issued to the auditee, with copies shared with local and executive management, as agreed
during the planning phase.
2. On a periodic basis, at the close of a plan period, a comprehensive report of all the internal audit
activities covering the entity and the plan period is prepared by the Chief Internal Auditor (or the
Engagement Partner, in case of external service provider). Such reporting is normally done on a
quarterly basis and submitted to the highest governing authority responsible for internal audits,
generally the Audit Committee. Some part of the aforementioned Internal Audit Reports may form
part of the periodic (e.g. Quarterly) report shared with the Audit Committee.
This Standard on Internal Audit (SIA) deals with the internal auditor’s responsibility to issue only the
first type of reports, the Internal Audit Report pertaining to specific audit assignments and not to t he
periodic (e.g. Quarterly) reporting for the whole entity as per the Annual/Quarterly audit plan.
On the basis of the internal audit work completed, the Internal Auditor shall issue a clear, well
documented Internal Audit Report which includes the following key elements
(a) An overview of the objectives, scope and approach of the audit assignments;
(b) The fact that an internal audit has been conducted in accordance the Standards of Internal Audit;
(c) An executive summary of key observations covering all important aspects, and specific to the
scope of the assignment;
(d) A summary of the corrective actions required (or agreed by management) for each observation;
and
(e) Nature of assurance, if any, which can be derived from the observations.
The content and form of the Internal Audit Report are to be established by the Internal Auditor based
on his best professional judgement, in consultation with the auditee and, if necessary, with inputs from

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other key stakeholders. No internal audit report shall be issued in final form unless a written draft of Question 2
the report has previously been shared with the auditee. State the important aspects to be considered by the External auditor in the evaluation of the
The internal audit report shall be issued within a reasonable time frame from the completion of the Internal Audit Function.
internal audit work. Answer 2
1. Basis of Internal Audit Report: Each internal audit report is prepared on the basis of the audit Evaluation of Internal Audit Functions by External Auditor: The external auditor’s general
procedures conducted and the analysis of the audit evidence gathered. Conclusions reached shall evaluation of the internal audit function will assist him in determining the extent to which he can place
be based on all the findings rather than on a few deviations or issues noted. Controls operating reliance upon the work of the internal auditor. The external auditor should document his evaluation
effectively have their own importance and should be acknowledged, while the risk and significance and conclusions in this respect.
of observations noted have a role to play in prioritising the matters to be reported.
The important aspects to be considered in this context are:
2. Conducted in Accordance with SIAs: Where the internal audit is conducted in compliance with
a) Organizational Status - Whether internal audit is undertaken by an outside agency or by an
the Standards of Internal Audit, (within the Framework governing Internal Audits), and the internal
internal audit department within the entity itself, the internal auditor reports to the management.
auditor can substantiate the same with supporting evidence and documentation, the internal audit
In an ideal situation, his reports to the highest level of management and are free of any other
report shall include a statement confirming that “the internal audit was conducted in accordance
operating responsibility. Any constraints or restrictions placed upon his work by management
with the Standards of Internal Audit issued by the Institute of Chartered Accountants of India”.
should be carefully evaluated. In particular, the internal auditor should be free to communicate
3. Content and Format of Internal Audit Report: The manner in which the internal audit report fully with the external auditor.
is drafted and presented is a matter of professional judgment and choice and could be influenced
b) Scope of Function - The external auditor should ascertain the nature and depth of coverage of
by the preferences of the recipients. The SIA does not mandate any particular format or list of
the assignment which the internal auditor discharges for management. He should also ascertain
contents since the Internal Auditor is expected to exercise his best professional judgement on
to what extent the management considers, and where appropriate, acts upon internal audit
matters regarding how and what to report. Where some level of assurance is being provided, the
recommendations.
form and content of the report shall be as per SIA 380, “Issuing Assurance Reports”. A typical
internal audit report should include the following: c) Technical Competence - The external auditor should ascertain that internal audit work is performed
by persons having adequate technical training and proficiency. This may be accomplished by
• Audit Scope performed
reviewing the experience and professional qualifications of the persons undertaking the internal
• Audit period Covered audit work.
• Executive Summary d) Due Professional Care - The external auditor should ascertain whether internal audit work appears
• Summary of the critical findings to be properly planned, supervised, reviewed and documented. An example of the exercise of
• Detailed audit findings with elaboration on business impact and root cause of such issues due professional care by the internal auditor is the existence of adequate audit manuals, audit
Programmes and working papers.
• Rating of the highlighted issues (E.g High / Medium / Low) in accordance to the rating criteria
approved by Audit Committee
• Audit recommendation to improve control environment and address the highlighted finding Question 3
Response received from the responsible functional authority containing action plan and target AB Pvt. Ltd. company has outstanding loans or borrowings from banks exceeding one hundred
timelines for action crore rupees wants to appoint an internal auditor. Please guide him for the applicability of the
4. Documentation: To confirm compliance of audit procedures with this SIA, the list of documents same and who can be appointed as an internal auditor and what work would be reviewed by
required is as follows: him.
(a) Copies of draft and final internal audit reports to be maintained, appropriately cross referenced to Answer 3
specific observations. Applicability of Internal Audit: Section 138 of the Companies Act, 2013 states that every private
(b) If appropriate, management action plans may be counter signed by respective management personnel. limited company is required to conduct internal audit if its outstanding loans or borrowings from

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banks or public financial institutions exceeding one hundred crore rupees or more at any point of time He should examine the system of periodical review of existing policies particularly when there
during the preceding financial year. is a change in the method and nature of operations of the enterprise. By combining the results
In view of above provisions, AB Pvt. Ltd. is under compulsion to conduct internal audit as its loans of his review of the adequacy of the systems with the result of his compliance tests, the internal
or borrowings are falling under the prescribed limit. auditor should be able to evaluate the effectiveness of the former. He should point out specific
weaknesses and suggest remedial action.
Who can be appointed as Internal Auditor- The internal auditor shall either be a chartered accountant
or a cost accountant, whether engaged in practice or not, or such other professional as may be decided (iv) Review of Relevance and Reliability of Information - The internal auditor should review the
by the Board to conduct internal audit of the functions and activities of the companies. information systems to evaluate the reliability and integrity of financial and operating information
given to management and to external agencies such as governmental bodies, investors, trade
The internal auditor may or may not be an employee of the company.
organisations, labour unions, etc. He should examine the accuracy and reliability of financial
Work to be reviewed by Internal Auditor- and operational records.
In addition, each of the managerial functions should be reviewed by the internal auditor. The scope of The usefulness of the reports as well as of the records should be evaluated with reference to
internal auditor’s work should also include a review of- their costs.
(i) Review of Internal Control System and Procedures - The internal auditor should examine whether the reporting is by exception i.e. the reports
(a) The review of internal control system and procedures involves assessing the design and highlight the significant and distinct ive features. In case of automated management information
operational efficiency and effectiveness of the internal control system to strengthen the overall system, where relevant information used for critical decision making is generated from the
internal control environment of the entity. The objective to review is to minimise the overall computer system, then adequacy of the controls build in the system should be reviewed to
residual risk by suggesting the appropriate controls to reduce the inherent risk. ensure data integrity and reliability of such information.
As far as possible, controls should be in-built in the operating functions for prevention or timely (v) Review of the Organisation Structure - The internal auditor should conduct an appraisal
detection of the fraud and errors and minimize the cost of control. of the organisation structure to ascertain whether it is in harmony with the objectives of the
enterprise and whether the assignment of responsibilities is in consonance therewith. For this
(b) Internal Control System should be reviewed considering the limitations of internal controls, i.e.,
purpose:
costbenefit comparison, human errors, collusion, and abuse by process owners.
• He should review the manner in which the activities of the enterprise are grouped for managerial
It should also be seen whether the internal controls were in use throughout the period of intended
control. It is also important to review whether responsibility and authority are in harmony with
reliance. A break-down in internal controls for a specific portion of intended reliance would
the grouping pattern.
need special attention.
• The internal auditor should examine the organisation chart to find out whether the structure is
(ii) Review of Custodianship and Safeguarding of Assets -
simple and economical and that no function enjoys an undue dominance over the others.
• This involves verifying the existence of the assets.
• He should particularly see that the responsibilities of managerial staff at headquarters do not
• The internal auditor should review the segregation of duties is in place. overlap with those of chief executives at operating units. He should examine whether there is a
• The internal auditor should review the control systems to ensure that all assets are accounted for satisfactory balance between the authority and responsibility of important executives.
fully. He should review the means used for safeguarding assets against losses e.g. fire, improper • The internal auditor should examine the reasonableness of the span of control of each executive
or negligent activity, theft and illegal acts, etc. (the number of subordinates that an executive controls). He should examine whether there is a
• He should review the control systems for intangible assets e.g. the procedures relating to credit unity of command i.e., whether each person reports only to one superior.
control. Where an enterprise uses electronic data processing equipment, the physical and systems • Where dual responsibilities cannot be avoided, the primary one should be specified and the
control on processing facilities as well as on data storage should be examined and tested. specific responsibility to each senior fixed. This must be made known to all concerned.
(iii) Review of Compliance with Policies, Plans, Procedures and Regulations - It is essential • He should review adequate segregation of duties is considered while defining the organization
that the various functional segments of an enterprise comply with the relevant policies, plans, structure.
procedures, laws and regulations so that the operations are carried out in a coordinated manner.
• Finally, he should evaluate the process of managerial development in the enterprise.

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(vi) Review of Utilisation of Resources – The external auditor

• The internal auditor should check whether proper operating standards and norms have been shall consider Nature &
established for measuring the economical and efficient use of resources. scope of work done &
(i) Objectivity of the
Determining the Nature & its relevance to overall
• They should be detailed enough to be identifiable with specific operating responsibilities and internal audit functions.
Extent of work of Internal Strategy & Audit Plan
should be capable of being used by operating personnel for monitoring and evaluating their
(ii) Level of competence
performance. Audit function that can be
of internal audit function.
used Determine adequacy of
• The internal auditor should review the methods of establishing operating standards and norms.
(iii) Whether a systematic
He should carefully examine the assumptions made while setting the standards to ensure that Internal Audit work for
they are appropriate and necessary. external auditors purpose
• Where there is a wide divergence between actual performance and the corresponding standards,
reasons may be considered. As a part of evaluating resources utilisation, identifying the facilities Question 5
which are under-utilized is an important function of the internal auditor. Mr. A is appointed as a statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint an internal
(vii) Review of Accomplishment of Goals and Objectives - The internal auditor should review the auditor as per statutory provisions given in the Companies Act, 2013 and appointed Mr. B as its
overall objectives of the enterprise to evaluate whether they are clearly stated and are attainable. internal auditor. The external auditor Mr. A asked internal auditor to provide direct assistance
The internal auditor should examine whether, to the extent possible, objectives are expressed in to him regarding evaluating significant accounting estimates by the management and assessing
precise quantifiable terms (both monetary and non-monetary) to facilitate detailed planning to the risk of material misstatements.
be made for achieving them. a) Discuss whether Mr. A, statutory auditor, can ask direct assistance from Mr. B, internal
Budgeting forms an important part of such planning. This will ensure that plans anticipate the problem auditor as stated above in view of auditing standards.
areas. There should also be sufficient flexibility in the plans to permit such improvements in their b) Will your answer be different if Mr. A asks direct assistance from Mr. B, internal auditor
implementation, as would benefit the enterprises as a whole. with respect to external confirmation requests and evaluation of the results of external
confirmation procedures?
Answer 5
Question 4
a) Direct Assistance from Internal Auditor: As per SA 610 “Using the Work of Internal Auditor”,
Moon Ltd. of which you are the Statutory Auditor, have an internal audit being conducted by
the external auditor shall not use internal auditors to provide direct assistance to perform procedures
an outside agency. State the factors that weigh considerations in opting to make use of direct
that Involve making significant judgments in the audit.
assistance of the internal auditors for the purpose of statutory audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external
Answer 4
auditor needs to make the significant judgments in the audit engagement.
The external auditor shall not use the work of the internal audit function if the external auditor
Significant judgments include the following:
determines that the function’s organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors; the function lacks sufficient competence or the • Assessing the risks of material misstatement;
function does not apply a systematic and disciplined approach, including quality control. • Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use of the going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters affecting the
auditor’s report.
In view of above, Mr. A cannot ask direct assistance from internal auditors regarding evaluating
significant accounting estimates and assessing the risk of material misstatements.
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b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures: SA status of independent auditor. He may administratively report to CEO or Managing Director for his
610 “Using the Work of Internal Auditor”, provide relevant guidance in determining the nature and administrative reporting purpose or any other similar authority till the time it is approved by Board of
extent of work that may be assigned to internal auditors. In determining the nature of work that may Directors and it does not impact his independence to be able to perform his duties and report to audit
be assigned to internal auditors, the external auditor is careful to limit such work to those areas that committee / Board of Director independently.
would be appropriate to be assigned.
Further, in accordance with SA 505, “External Confirmation” the external auditor is required to
Question 7
maintain control over external confirmation requests and evaluate the results of external confirmation
procedures, it would not be appropriate to assign these responsibilities to internal auditors. However, The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The
internal auditors may assist in assembling information necessary for the external auditor to resolve Audit committee requested Mr. A to present their Internal Audit plan for next financial year?
exceptions in confirmation responses. What approach would Mr. A follow to prepare the internal audit plan for next year?
Answer 7
Question 6 The internal auditor should, in consultation with those charged with governance, including the audit
committee, develop and document a plan for each internal audit engagement to help him conduct the
The XYZ Ltd has to appoint Mr. A as Chief Internal Auditor to lead the internal audit function engagement in an efficient and timely manner.
for the Company. The Managing Director of the Company has asked the HR head to define the
reporting structure of the Chief Internal Auditor, so that he can discharge his duties objectively? Internal audit plan should be developed in such a manner that all the business processes covering both
Suggest the ideal reporting structure of the Chief Internal Auditor that HR head may propose financial as well as operational activities are reviewed by internal audit function within a defined time
to the Managing Director? cycle.
Answer 6 Also, ensuring that appropriate consideration is made and adequate balance is ensured to the
following:
HR Head need to evaluate multiple options and identify most suitable option in light of the relevant
provisions, guidance and overall governance of the organization. HR head also need to evaluate • Risk underlying the business process
different option for his administrative reporting and various options for functional reporting of Chief • Value that the internal audit can provide to the organization
Internal Auditor. The possible options to be considered and evaluated include Board of Directors, • Effort involved in conducting the internal audit for a particular business process
Audit Committee, Managing Director of the Company, Chief Executive Officer or Chief Financial
• Risk Appetite of the organization.
Officer.
• Coverage of all auditable areas within the defined time range
As per section 138 of the Companies Act 2013, the internal auditor shall either be a chartered accountant
or a cost accountant (whether engaged in the practice or not), or such other professional as may be
decided by the Board to conduct an internal audit of the functions and activities of the company. Question 8
As per the revised definition of the term ‘Internal Audit’ as per para 3 of the ICAI’s Framework The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The
Governing Internal Audits, “Internal audit provides independent assurance on the effectiveness of Audit committee requested Mr. to perform detailed analysis of their expenses in previous year
internal controls and risk management processes to enhance governance and achieve organizational and report all risks and underlying gaps? What audit approach should Internal Auditor follow
objectives”. to identify such gaps?
The Internal Auditor shall be free from any undue influences which force him to deviate from the Answer 8
truth. This independence shall be not only in mind but also in appearance. Also, the internal auditor
shall resist any undue pressure or interference in establishing the scope of the assignments or the Typical internal audit engagement comprises of following five steps:
manner in which these are conducted and reported, in case these deviate from set objectives. Step 1 – Obtain knowledge of the Business and its Environment
As per the requirement of the above stated provision, Chief Internal Auditor need to be independent Internal Auditor must conduct meetings with key stakeholders, Board of Directors and Key management
of the operational activities and report of Audit Committee / Board of Directors to enjoy his true personals to obtain understanding of the organization’s business environment, its operations,
organization’s vision, mission and top management’s expectations from the audit functions.
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Internal auditor must obtain understanding of various business documents – Standard Operating issues and controls gaps. Interim reports may be issued after proper review of the work performed as
Procedures and Financial Statement Etc. per the Standard on Internal Audit (SIA) 350, Review and Supervision of Audit Assignments.
Internal auditor must also obtain understanding of the underlying Information Technology landscape, Adequate document of the internal audit work papers needs to be ensured as per Standard on Internal
various applications and ERP systems of the organization and Management Information System of Audit (SIA) 330, Internal Audit Documentation
the organization. Step 5 – Reporting of Internal Audit Issues
Internal auditor must also obtain understanding of the regulatory landscape and various laws and Internal Auditor must prepare a draft report of Internal Audit issues comprising of the business process/
regulations that are applicable to the organization. function reviewed as per scope, detailed audit coverage and exclusions, if any, audit period covered
Step 2 – Perform Audit Planning during the audit, summary along with detailed issues over the gaps noted along with implication of
Internal Auditor must plan the audit engagement as per the Standard on Internal Audit (SIA) 310, the business and recommendation to mitigate the identified gaps.
Planning the Internal Audit Assignment. Audit scope must be approved by Audit Committee and Management Action Plan should be agreed along with responsibility of action and timelines for
Board of Directors. actions.
Once approved, Internal Auditor must share detailed Audit Plan with the key managerial personals Internal Auditor must also review the status of actions taken by the management against the actions
and plan in advance the detailed schedule of the Internal Audit to be conducted. agreed during previous audits and report the status of such follow up in the audit report.
Internal Auditor must conduct the opening meeting with key stakeholders before start of audit Internal Auditor should thereafter circulate Final Report and presentation his findings to the Audit
engagement and share details of Information and System Access required to perform the audit. Committee.
Detailed work plan must be prepared by the audit managers and approved with Head of Internal Audit Internal auditor must adhere to Standard on Internal Audit (SIA) 360, Communication with
/ Chief Internal Auditor. The work plan must be prepared after performing the evaluation of all major Management and Standard on Internal Audit (SIA) 370, Reporting Results while sharing the result of
underlying risks in the process being reviewed and the audit checks to be performed to assess the internal audit with the stakeholders.
adequacy of the control environment to mitigate such risks.
Step 3 – Gather required information
Question 9
Internal Auditor must obtain the required information and perform checks to ensure correctness and
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The
integrity of information received. To the extent possible, Internal Auditor must obtain the information
Audit committee requested Mr. to present detailed report on their finding and areas where
directly from the source.
immediate action is needed to mitigate critical risks? What should be the content of internal
Adequate planning should be done and advance intimation should be made for any interim information audit report to address this requirement of the Audit Committee?
needed for performing audit checks.
Answer 9
Step 4 – Perform audit checks
As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of internal audit
Internal Auditor should collate all data and perform analytical procedures to identify key trends and results is generally undertaken in two stages:
outliers.
• At the end of a particular audit assignment, an “Internal Audit Report” covering a specific area,
Analytical procedures should be performed in accordance with the Standard on Internal Audit (SIA) function or part of the entity is prepared by the Internal Auditor highlighting key observations
6, Analytical Procedures. To the extent possible, relevant analytical tools may be used to perform arising from those assignments. This report is generally issued with details of the manner in which
review of the complete data for the audit period. the assignment was conducted and the key findings from the audit procedures undertaken. This
Wherever needed, Internal Auditor must select the sample in accordance with Standard on Internal report is issued to the auditee, with copies shared with local and executive management, as agreed
Audit (SIA) 5, Sampling. during the planning phase.
Detailed audit testing must be performed as per the audit work plan. Internal Auditor must ensure • On a periodic basis, at the close of a plan period, a comprehensive report of all the internal audit
adequate evidences must be collected and stores in accordance to Standard on Internal Audit (SIA) activities covering the entity and the plan period is prepared by the Chief Internal Auditor (or the
320, Internal Audit Evidence Internal Auditor must prepare detailed listed of the Identified audit Engagement Partner, in case of external service provider). Such reporting is normally done on a

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quarterly basis and submitted to the highest governing authority responsible for internal audits, • Implementation Action agreed by the management along with target implementation date
generally the Audit Committee. Some part of the aforementioned Internal Audit Reports may form • Status of action taken by management. The same may be classified under Implemented / Not
part of the periodic (e.g. Quarterly) report shared with the Audit Committee. Implemented
Accordingly, a typical internal audit report should include the following: • Residual risk and rating for any unimplemented action
• Audit Scope performed; • Audit findings not implemented for long period of time
• Audit period Covered; • Any critical audit finding that require immediate action for action or implementation.
• Executive Summary;
• Summary of the critical findings;
Question 11
• Detailed audit findings with elaboration on business impact and root cause of such issues;
After an illustrious career in Indian Audit & Accounts Service for about 25 years, Parteek, a post
• Rating of the highlighted issues (E.g High / Medium / Low) in accordance to the rating criteria graduate in law, has taken voluntary retirement from government service. Being in fine spirits, he
approved by Audit Committee; wants to take responsibilities in corporate sector as Chief internal auditor. On looking at attractive
• Audit recommendation to improve control environment and address the highlighted finding; compensation packages, he applied for such position in a leading listed company engaged in oil
refining business. The Board of company is keen on him due to his impressive credentials.
• Response received from the responsible functional authority containing action plan and target
timelines for action. Can he be appointed in this leading position of said company?
Answer 11
Question 10 As per section 138 of Companies Act, 2013 the internal auditor shall either be a chartered accountant
or a cost accountant (whether engaged in the practice or not), or such other professional as may be
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year.
decided by the Board to conduct an internal audit of the functions and activities of the company.
The Audit committee requested Mr. A to present their analysis on the implementation of
recommendation of previous audit report and highlight critical areas which need immediate The Board can appoint any professional as may be decided by it. The applicant in question is a law
attention of Audit Committee? What should be the steps followed by internal auditor to address post graduate and he has spent 25 years of his career in Indian Audit & Accounts Service. Therefore,
this requirement of Audit Committee? he has got the necessary experience and skills required for the said vacancy. The Board would be in
a position to appoint such a competent and experienced person in the field of auditing as its Chief
Answer 10
Internal auditor.
As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief Internal Auditor is responsible
for continuously monitoring the closure of prior audit issues through timely implementation of action
plans included in past audits. This shall be done with a formal monitoring process, elements of which Question 12
are pre-agreed with management and those charged with governance. The responsibility to implement CA Deva is internal auditor of a listed company. The company wants to make sure that it is in
the action plans remains with the management. compliance with SEBI requirements at all times and it is never on the wrong side of law. It asks its
In monitoring and reporting of prior audit issues, the responsibility of the Internal Auditor is usually internal auditor to manage its compliance tracking system including directly corresponding with
in the form of an “Action Taken Report (ATR) of previous audits”. regulator in this regard. The profile and scope of internal audit agreed at time of appointment
included “compliance with laws and regulations.”
To address the requirement of Audit Committee in the given situation, Internal Auditor should assess
the action taken against the previous audit findings and report a summary of the action taken by the Can he perform such type of activities in capacity of internal auditor of company?
management. Answer 12
Typical Action Taken Report may include the following: The Internal Auditor does not assume any responsibility to manage or operate the compliance
• Reference to the previous audit reporting containing the reported issues framework or to take compliance related decisions. It is not responsibility of the Internal Auditor to
execute or resolve compliance related risks (e.g., engaging directly with regulators, etc.).

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Although internal audit function provides independent assurance to enhance governance (which e) Limited opportunities for promotion;
includes compliance with laws and regulations), it does not assume operational responsibility of its f) Low monetary benefits;
compliance framework. It is the responsibility of the management. He is responsible for auditing the
g) Lack of Labour welfare schemes;
compliance framework and not managing it. Similarly, he does not accept compliance related risks
like directly engaging with regulator. h) Whether the organization has properly qualified and experienced personnel for the various levels
of works?
i) Is the number of people employed at various work centers excessive or inadequate?
Question 13
j) Does the organization provide facilities for staff training so that employees and workers keep
Up Down Limited is in doldrums since last two years. The demand for its products has declined
themselves abreast of current techniques and practices?
drastically.
The statutory auditor is of the view that situation has put into question going concern assumption
of the company. Its internal auditor has helped management in devising a strategy to deal with CASE STUDY
such risks and come out of the situation. The plan includes venturing into different product JKT Pvt. Ltd. having ₹ 40 lacs paid-up capital, ₹9.50 crores reserves and turnover of last three
lines using same plant with minor modifications. Further, internal auditor has also prepared consecutive financial years, immediately preceding the financial year under audit, being ₹ 49
estimates of revenue generation along with cash flows. crores, ₹ 145 crores and ₹ 260 crores, but does not have any internal audit system. In view of the
Can statutory auditor place total reliance on work performed by internal auditor in this regard? management, the internal audit system is not mandatory. Comment.
Answer 13 Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013,
read with rule 13 of Companies (Audit and Auditors) Rules, 2014, every private company shall
The greater the judgment needed to be exercised in planning and performing the audit procedures
be required to appoint an internal auditor or a firm of internal auditors, having
and evaluating the audit evidence, the external auditor will need to perform more procedures directly
because using the work of the internal audit function alone will not provide the external auditor with (i) turnover of two hundred crore rupees or more during the preceding financial year; or
sufficient appropriate audit evidence. (ii) outstanding loans or borrowings from banks or public financial institutions exceeding one
The appropriate use of going concern assumption requires significant judgment on part of statutory hundred crore rupees or more at any point of time during the preceding financial year.
auditor. Conclusion: In the instant case, JKT Pvt. Ltd. is having a turnover of ` 260 crores during the
Therefore, statutory auditor cannot place total reliance on internal auditor’s work in this regard and he preceding financial year which is more than two hundred crore rupees. Hence, the company has
should perform more procedures directly. the statutory requirement to appoint an Internal Auditor and mandatorily conduct an internal
audit
Illustration 14
The Managing Director of X Ltd is concerned about high employee attrition rate in his company.
As the internal auditor of the company he requests you to analyze the causes for the same. What
factors would you consider in such analysis?
Answer 14
The factors responsible for high employee attrition rate are as under:
a) Job Stress & work life imbalance;
b) Wrong policies of the Management;
c) Unbearable behavior of Senior Staff;
d) Safety factors;
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INTERNAL AUDIT
CA Harshad Jaju
98812 92971
17
CHAPTER
DUE DILIGENCE,
INVESTIGATION AND
FORENSIC AUDIT
Question 1
A Ltd who is one of the leading manufacturer of kids clothing is interested to acquire B Ltd. B
Ltd is currently a manufacturer of women’ clothing. As a professional consultant in due diligence
and valuation, A Ltd entrusted you to value B Ltd. The valuation of B Ltd is dependent on future
maintainable sales. Discuss the factors you would consider in assessing the future maintainable
turnover of B Ltd? (MTP 4 Marks Mar 19, PYP 4 Marks Nov 22)
Answer 1
In assessing the turnover which the business would be able to maintain in the future, the following
factors should be taken into account:
(a) Trend: Whether in the past, sales have been increasing consistently or they have been fluctuating.
A proper study of this phenomenon should be made.
(b) Marketability: Is it possible to extend the sales into new markets or that these have been fully
exploited? Product wise estimation should be made.
(c) Political and economic considerations: Are the policies pursued by the Government likely to
promote the extension of the market for goods to other countries? Whether the sales in the home
market are likely to increase or decrease as a result of various emerging economic trends?
(d) Competition: What is the likely effect on the business if other manufacturers enter the same field
or if products which would sell in competition are placed on the market at cheaper price? Is the
demand for competing products increasing? Is the company’s share in the total trade constant or
has it been fluctuating?
Question 2
Lamba, Malhora and Khandelwal are partners in a firm sharing profits and losses in the ratio
2:2:1. The partners have agreed to take Mr. Jain as a partner with effect from 1st April, 2019 as
1/4th partner. What are the important steps involved while conducting investigation on behalf
of Mr. Mistri, the incoming partner? (MTP 5 Marks May 20, MTP 5 Marks Apr’18, MTP 5
Marks March ’23)
Answer 2
Steps involved while conducting investigation on behalf of an incoming partner: The general
approach of the investigating accountant in this type of investigation would be more or less similar,
irrespective of the nature of business of the firm-manufacturing, trading or rendering a service.
CA Harshad Jaju
98812 92971
DUE DILIGENCE, INVESTIGATION AND FORENSIC AUDIT DUE DILIGENCE, INVESTIGATION AND FORENSIC AUDIT
Primarily, an incoming partner would be interested to know whether the terms offered to him are (x) Appraisal of the record of capital employed and the rate of return. It is necessary to have a
reasonable having regard to the nature of the business, profit records, capital distribution, personal comparison with alternative business avenues for investments and evaluation of possible results
capability of the existing partners, socio-economic setting, etc., and whether he would be capable of on a changed capital and organisation structure, if any, envisaged along with the admission of
deriving continuing benefit in the shape of return on capital to be contributed and remuneration for the partner.
services to be rendered, which can be justified by the overall economic conditions prevailing and (xi) It would be useful to have a first hand knowledge about the specialisation, if any, attained by
other considerations considering his own personality and achievements. In addition, he would be the firm in any of its activities.
interested to ascertain whether the capital to be contributed by him would be safe and applied usefully.
(xii) Manner of computation of goodwill on admission as also on retirement, if any, should be
Broadly, the steps involved are the following: ascertained.
(i) Ascertainment of the history of the inception and growth of the firm. (xiii) Whether any special clause exists in the deed of partnership to allow admission in future of a
(ii) Study of the provisions of the deed of partnership, particularly for composition of partners, their new partner, who may be specified, on concessional terms.
capital contribution, drawing rights, retirement benefits, job allocation, financial management, (xiv) Whether the incomplete contracts which will be transferred to the reconstituted firm will be a
goodwill, etc. liability or a loss.
(iii) Scrutiny of the record of profitability of the firm’s business over a suitable number of years, It would always be worthwhile to remember that, in a partnership, personal considerations
with usual adjustments that are necessary in ascertaining the true record of business profits. count predominantly over other considerations and assessment of standing of the firm, standing
Particular attention should, however, be paid to the nature of partners’ remuneration, which and reliability of other partners, their personal reputation and the goodwill enjoyed by the
may be excessive or inadequate in relation to the nature and profitability of the business, products/services are important.
qualification and expertise of the partners and such other factors as may be relevant.
On the basis of the broad frame of considerations as given above, the investigating accountant
(iv) Examination of the asset and liability position to determine the tangible asset backing for the should devise his own considerations in each case which may be quite diverse. Additional
partner’s investment, appraisal of the value of intangibles like goodwill, know how, patents, etc. considerations may come up in the case of service-rendering firms where profit and business
impending liabilities including contingent liabilities and those for pending tax assessment. In record, goodwill of the firm and of individual partners would assume greater significance.
case of firms rendering services, the question of tangible asset backing usually is not important,
Again, in the case of industrial firms, the network of customers, their scatter, size, etc., would be
provided the firm’s profit record, business coverage and standing of the partners are of the
relevant for consideration.
acceptable order.
(v) Position of orders at hand and the range and quality of clientele should be thoroughly examined,
which the firm is presently operating. Question 3
(vi) Position and terms of loan finance would call for careful scrutiny to assess its usefulness and A nationalized bank received an application from a Limited company seeking sanction of a
implication for the overall financial position; reason for its absence should be studied. term loan to expand its existing business. In this connection, the Loan Manager of the Bank
(vii) It would be interesting to study the composition and quality of key personnel employed by the approaches you to conduct a thorough investigation of the items of the Balance Sheet of this
firm and any likelihood of their leaving the organisation in the near future. Limited company and submit a confidential report based on which he will decide whether
to sanction this loan or not. List out the major steps an investigating accountant would keep
(viii) Various important contractual and legal obligations should be ascertained and their nature
in mind while verifying assets and liabilities included in the Balance Sheet of the borrower
studied. It may be the case that the firm has standing agreement with the employees as regards
company which has been furnished to the Bank (5 Marks, Oct 20)
salary and wages, bonus, gratuity and other incidental benefits. Full import of such standing
agreements would be gauged before a final decision is reached. Answer 3
(ix) Reasons for the offer of admission to a new partner should be ascertained and it should be Steps involved in the verification of assets and liabilities included in the Balance Sheet of the borrower
determined whether the same synchronises with the retirement of any senior partner whose company which has been furnished to the Bank - The investigating accountant should prepare schedules
association may have had considerable bearing on the firm’s success. of assets and liabilities of the borrower and include in the particulars stated below:

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(i) Fixed assets - A full description of each item, its gross value, the rate at which depreciation has (vi) Provision of Taxation - The previous years up to which taxes have been assessed should be
been charged and the total depreciation written off. In case the rate at which depreciation has been ascertained. If provision for taxes not assessed appears in be inadequate, the fact should be
adjusted is inadequate, the fact should be stated. In case any asset is encumbered, the amount stated along with the extent of the shortfall.
of the charge and its nature should be disclosed. In case an asset has been revalued recently, the (vii) Other Liabilities - It should be stated whether all the liabilities, actual and contingent, are
amount by which the value of the asset has been decreased or increased on revaluation should correctly disclosed. Also, an analysis according to ages of trade payables should be given to
be stated along with the date of revaluation. If considered necessary, he may also comment on show that the company has been meeting its obligations in time and has not been depending on
the revaluation and its basis. trade credit for its working capital requirements.
(ii) Inventory - The value of different types of inventories held (raw materials, work-in-progress (viii) Insurance - A schedule of insurance policies giving details of risks covered, the date of payment
and finished goods) and the basis on which these have been valued. of last premiums and their value should be attached as an anne xure to the statements of assets,
Details as regards the nature and composition of finished goods should be disclosed. Slow- together with a report as to whether or not the insurance-cover appears to be adequate, having
moving or obsolete items should be separately stated along with the amounts of allowances, regard to the value of assets.
if any, made in their valuation. For assessing redundancy, the changes that have occurred (ix) Contingent Liabilities - By making direct enquiries from the borrower company, from
in important items of inventory subsequent to the date of the Balance Sheet, either due to members of its staff, perusal of the files of parties to whom any loan has been advanced those
conversion into finished goods or sale, should be considered. of machinery suppliers and the legal adviser, for example, the investigating accountant should
If any inventory has been pledged as a security for a loan the amount of loan should be disclosed. ascertain particulars of any contingent liabilities which have not been disclosed. In case, there
(iii) Trade Receivables, including bills receivable - Their composition should be disclosed to are any, these should be included in a schedule and attached to the report.
indicate the nature of different types of debts that are outstanding for recovery; also whether the Finally, the investigating accountant should ascertain whether any application for loan to another
debts were being collected within the period of credit as well as the fact whether any debts are bank or any other party has been made. If so, the result thereof should be examined.
considered bad or doubtful and the provision if any, that has been made against them.
Further, the total amount outstanding at the close of the period should be segregated as follows:
Question 4
(a) debts due in respect of which the period of credit has not expired;
LMN Ltd. entered into a deal with SP Ltd. for buying its business of manufacturing wooden
(b) debts due within six months; and products/ goods. LMN Ltd. has appointed your firm for conducting due diligence review and
(c) debts due but not recovered for over six months. they want to know the cash generating abilities of SP Ltd. What points will you check in order
to ensure that the manufacturing unit of SP Ltd. will be able to meet the cash requirements
If any debts are due from directors or other officers or employees of the company, the particulars
internally? (MTP 5 Marks, March’ 21, Old & New SM)
thereof should be stated. Amounts due from subsidiary and affiliated concerns, as well as those
considered abnormal should be disclosed. The recoveries out of various debts subsequent to the Answer 4
date of the Balance sheet should be stated. In order to ensure that the manufacturing unit of SP Ltd. will be able to meet the cash requirements
(iv) Investments - The schedule of investments should be prepared. It should disclose the date internally, one is required to verify:
of purchase, cost and the nominal and market value of each investment. If any investment is (i) Is the company able to honour its commitments to its trade payables, to the banks, to the
pledged as security for a loan, full particulars of the loan should be given. government and other stakeholders?
(v) Secured Loans - Debentures and other loans should be included together in a separate schedule. (ii) How well is the company able to convert its trade receivables and inventories?
Against the debentures and each secured loan, the amounts outstanding for payments along with
(iii) How well the Company deploys its funds?
due dates of payment should be shown. In case any debentures have been issued as a collateral
security, the fact should be stated. Particulars of assets pledged or those on which a charge has (iv) Are there any funds lying idle or is the company able to reap maximum benefits out of the
been created for re-payment of a liability should be disclosed. available funds?
(v) What is the investment pattern of the company and are they easily realizable?

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Cash Flow - A review of historical cash flows and their pattern would reflect the cash generating • Suggestions on various aspects to be taken care of before and after the proposed merger / acquisition.
abilities of the target company and should highlight the major trends. It is important to know if • Status of franchises, license and patents.
the company is able to meet its cash requirements through internal accruals or does it have to seek
Finally, an executive summary may be prepared highlighting the significant areas.
external help from time to time
Question 6
Question 5
A German Company engaged in the business of manufacturing and distribution of industrial
Ekbote Co. is currently a large organisation trading in items of office furniture. The entity
gases, is interested in acquiring a listed Indian Company having a market share of more than
wants to expand and hence are looking at acquisition of Rawat Co which deals in items of
65% of the industrial gas business in India, request you to conduct a “Due Diligence” of this
household furniture. Ekbote Co. hires a Chartered accountant to conduct a due diligence to
Indian Company and submit your Report. As due Diligence Auditor, discuss the key areas you
consider whether there is the potential for additional value to be brought out of the target
will cover in your review. (MTP 5 Marks, Oct 18)
company by improving its operational function and also whether there are serious operational
risks about which the potential buyer should be concerned (thereby allowing the buyer to Answer 6
consider aborting the deal or renegotiating the price). Which of the due diligence review would Due Diligence – Key Areas: The German company engaged in the business of manufacturing and
be helpful to achieve the above objective? You are also required to briefly discuss the contents distribution of industrial gases wishing to acquire a listed Indian company has commissioned the Due
of a due diligence report. (MTP 4 Marks, April 19) Diligence Audit to assess the strengths and weaknesses of this company. It is quite important for the
Answer 5 acquirer to assess the proposal from different angles and specifically as per terms of the assignment
and also see whether proposed merger would create operational synergies. On the other hand, financial
In the instant case Operational Due Diligence is required to confirm that the business plan provided is
due diligence review would be performed after the commercial valuation. Accordingly, while a
achievable with the existing facilities plus the capital expenditure outlined in the business plan.
preliminary review might be performed during initial stages of the restructuring exercise and may
Contents of a Due Diligence Report: Briefly, the contents of a due diligence report can be discussed in fact, be performed simultaneously with the commercial evaluation, at a later stage, financial due
under: diligence may be performed on the books of account and other information directly pertaining to the
• Terms of reference and scope of verification. financial matters of the entity. In addition, a legal due diligence may be required where legal aspects
• Objective of due diligence. of functioning of the entities are reviewed; for example, the lega l aspects of property owned by the
entity or compliance with various statutory requirements under various laws. Like other due diligence
• Brief history of the company including shareholding pattern.
exercises, environmental and personnel due diligence are also carried out in order to establish whether
• Assessment of management structure. various propositions with regard to environment and personnel of the enterprise under review are
• Assessment of financial liabilities with special emphasis on Interlocking investments and financial appropriate. In any case, it is quite important to look behind the veil of initial information provided
obligations with group/associates companies, amounts receivables subject to litigation, any other by the company and to assess the benefits and costs of the proposed acquisition/merger by inquiring
likely liability which is not provided for in the books of account. into all relevant aspects of the past, present and future of the business to be acquired. Some of the
significant key areas which shall be covered under the review are as under:
• Assessment of valuation of assets including comments on properties, terms of leases, lien and
encumbrances including status of charges, liens, mortgages, assets and properties of the company. (1) Historical Background: The accountant should begin the financial due diligence review by
looking into the history of the company and the background of the promoters. The details of
• Assessment of operating results.
how the company was set up and who were the original promoters have to be gone into, before
• Assessment of taxation and statutory liabilities. verification of financial data in detail. An eye into the history of the company may reveal its
• Assessment of possible liabilities on account of litigation and legal proceedings against the turning points, survival strategies adopted from time to time, the market share enjoyed by and
company and suggestion on ways and means including affidavits, indemnities, to be executed to changes therein, product life cycle and adequacy of resources. It could also help the accountant
cover unforeseen and undetected contingent liabilities. in determining whether, in the past, any regulatory requirements have had an impact on the
business of the said company. This could, inter alia, include the nature of business(es), location of
• Assessment of net worth.
production facilities, warehouses, offices, products or services and markets.

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(2) Significant Accounting Policies: The accountant should study the accounting policies being (d) Are there any funds lying idle or is the company able to reap maximum benefits out of the available
followed by the target and ascertain whether any accounting policy is inappropriate. The accountant funds?
should also see the effects of the recent changes in the accounting policies. The target might have (6) Financial Projections: The accountant should obtain from the target company the projections
changed its accounting policies in the recent past keeping in view its intention of offering itself for for the next five years with detailed assumptions and workings. He should ask the target to give
sale. projections on optimistic, pessimistic and most likely bases.
The overall scope has to be based on the accounting policies adopted by the management. The (7) Management and Employees - In most of the companies which are available for take over the
accountant has to look at the main effect of accounting policies on the overall profitability and problem of excess work force is often witnessed. It is important to work out how much of the
their correctness. It is reiterated that the accountant should mainly look at all material changes in labour force has to be retained. It is also important to judge the job profile of the administrative and
Accounting Policies in the period subjected to review very carefully. managerial staff to gauge which of these match the requirements of the new incumbents. Due to
The accountant’s report should include a summary of significant accounting policies used by the complex set of labour laws applicable to them, companies often have to face protracted litigation
target, that changes that have been made to the accounting policies in the recent past, the areas in from its workforce and it is important to gauge the likely impact of such litigation. The aspects
which accounting policies followed by the target are different from those adopted by the acquiring whether all employee benefits like PF, Gratuity, ESI and superannuation have been properly paid/
enterprise, the effect of such differences. funded. The pay packages of the key employees will be thoroughly reviewed since this can be a
(3) Review of Financial Statements: An evaluation of the profit reported by the company would crucial factor in future employee costs.
be largely based upon its operating results. Any extraordinary item of income or expense that (8) Statutory Compliance: During a due diligence this is one aspect that has to be investigated in
might have affected the operating results would require close examination. It is advisable to detail.
compare the actual figures with the budgeted figures for the period under review and those of the It is important therefore, to make a list of laws that are applicable to the entity as well as to make a
previous accounting period. It is important that the trading results for the past four to five years checklist of compliance required from the company under those laws. If the company has not been
are compared and the trend of normal operating profit arrived at. The normal operating profits regular in its legal compliance it could lead to punitive charges under the law. These may have to be
should further be benchmarked against other similar companies. Besides the above, and based on quantified and factored into the financial results of the company.
the trend of operating results, the accountant has to advise the acquiring enterprise, through due
diligence report, on the indicative valuation of the business. The exercise to evaluate the balance
sheet of the company has to take into consideration the basis upon which assets have been valued Question 7
and liabilities have been recognized. The net worth of the business has to be arrived at by taking
HSDC Bank Ltd., received an application from a pharmaceutical company for take over of their
into account the impact of over/under valuation of assets and liabilities.
outstanding term loans secured on its assets, availed from and outstanding with a nationalised
(4) Taxation - Tax due diligence is a separate due diligence exercise but since it is an integral component bank. HSDC Bank Ltd., requires you to make a due diligence audit in the areas of assets of
of the financial status of a company, it is generally included in the financial due diligence. It is pharmaceutical company especially with reference to valuation aspect of assets. State what may
important to check if the company is regular in paying various taxes to the Government. The be your areas of analysis in order to ensure that the assets are not stated at overvalued amounts.
accountant has to also look at the tax effects of the merger or acquisition. (MTP 4 Marks March 22 & Nov 21, Old & New SM, PYP 5 Marks May 18, RTP Nov’20)
(5) Cash Flow: A review of historical cash flows and their pattern would reflect the cash generating Answer 7
abilities of the target company and should highlight the major trends. It is important to know if
Over-Valued Assets: In case of due diligence exercise, the area of analysis in order to ensure that the
the company is able to meet its cash requirements through internal accruals or does it have to seek
assets are not stated at over-valued amounts are:
external help from time to time. It is necessary to check that:
• Uncollected/uncollectable receivables.
(a) Is the company able to honour its commitments to its trade payables, to the banks, to government
and other stakeholders? • Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
packing materials etc. with name of company.
(b) How well is the company able to turn its trade receivables and inventories
• Underused or obsolete Plant and Machinery and their spares; asset values which have been
(c) How well does it deploy its funds
impaired due to sudden fall in market value etc.

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• Assets carried at much more than current market value due to capitalization of expenditure/foreign Answer 9
exchange fluctuation, or capitalization of expenditure mainly in the nature of revenue.
An American company which is manufacturing and distributing industrial gases is looking forward
• Litigated assets and property. to acquire an Indian company having 51% market share and assets beyond ` 1000 crores. Areas to be
• Investments carried at cost though realizable value is much lower. covered as a part of due diligence exercise to find out over valued assets would be as under:
• Investments carrying a very low rate of income / return. 1. Uncollected/uncollectable receivables.
• Infructuous project expenditure/deferred revenue expenditure etc.
2. Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
• Group Company balances not reconciled. packing materials etc. with name of company.
• Intangibles having no relisable value.
3. Underused or obsolete Plant and Machinery and their spares; asset values which have been impaired
due to sudden fall in market value etc.
Question 8 4. Assets carried at much more than current market value due to capitalization of expenditure/foreign
CA Rani has been appointed as Forensic Audit Accountant by ATM Bank Limited for one of exchange fluctuation, or capitalization of expenditure mainly in the nature of revenue.
its borrowal accounts FAR Ltd. CA Rani started the audit by first reviewing the transactions 5. Litigated assets and property.
of the borrower in Bank statement as per Bank records to identify any hidden patterns in that
6. Investments carried at cost though realizable value is much lower.
information. She had to review huge volume of data, as the number of transactions per day were
in hundreds and the data was to be reviewed for the last three years. So, she was stuck up as to 7. Investments carrying a very low rate of income / return.
how to proceed further to identify any hidden patterns in information, if any. Guide CA Rani, 8. Infructuous project expenditure/deferred revenue expenditure etc.
suggesting which technique to be used for identifying any hidden patterns in the information. 9. Group Company balances under reconciliation etc.
(MTP 4 Marks Sep 22, MTP 4 Marks Mar’22, PYP 4 Marks, Nov ’20)
10. Intangibles of no value.
Answer 8
Data Mining Techniques:
Question 10
i. Data mining technique is a set of assisted techniques designed to automatically mine large volumes
of data for new, hidden or unexpected information or patterns. Mr. Shah is reviewing the anti-fraud controls for a construction company. The company has
witnessed a few frauds in the past mainly in the nature of material stolen from the sites and fake
ii. It discovers the usual knowledge or patterns in data, without a predefined idea or hypothesis about
expense vouchers.
what the pattern may be, i.e. without any prior knowledge of fraud.
Mr. Shah is evaluating options for verifying the process in detecting fraud and the corrective
iii. It explains various affinities, association, trends and variations in the form of conditional logic.
action to be taken in such cases. As an expert, you are required to advise Mr. Shah as how
iv. Data mining techniques are categorized in three ways: Discovery, Predictive modeling and inventory fraud occurs and the verification procedure to be followed for detecting the same.
Deviation and Link analysis. (MTP 5 Marks, Oct 19, RTP May 19)
In the given case of ATM Bank Ltd., CA Rani appointed as forensic auditor accountant for its borrower, Answer 10
FAR Ltd, shall use above stated data mining techniques to identify any hidden patterns of information.
Inventory frauds - Inventory frauds are many and varied but here we are concerned with misappropriation
of goods and their concealment.
Question 9 (i) Employees may simply remove goods from the premises.
An American company engaged in the business of manufacturing and distribution of industrial (ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
gases, is interested in acquiring a listed Indian Company having a market share of 51% and (iii) Inventory records may be manipulated by employees who have committed theft so that book
assets over ` 1000 Crore. It requests you to conduct “Due Diligence” of assets of this listed Indian quantities tally with the actual quantities of inventories in hand.
Company to find out, if any of the assets is overvalued. List down the areas of due diligence
exercise to find out overvalued assets. (MTP 5 Marks Oct ’22, PYP 5 Marks Jan’21)
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Verification Procedure for Defalcation of inventory - It may be of trading stock, raw materials, Question 11
manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The CA. Rajul is acting as Credit manager in branch of DFC Bank Limited. A company has
loss may be the result of a theft by an employee once or repeatedly over a long period, when the approached the branch for a request to sanction credit facilities worth ₹10 crore for meeting
same have not been detected. Such thefts usually are possible through collusion among a number of usual business requirements. It is a prospective new client. She checks past history of the
persons. Therefore, for their detection, the entire system of receipts, storage and dispatch of all goods, company, back ground of promoters & directors, shareholding pattern and nature of business.
etc. should be reviewed to localize the weakness in the system. Assessment of financial results of past years and future projections is also undertaken. She also
The determination of factors which have been responsible for the theft and the establishment of guilt carries out SWOT analysis of the company.
would be difficult in the absence of: Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score and
(a) a system of inventory control, and existence of detailed record of the movement of inventory, or position of name of promoters/directors in RBI defaulter list is also verified.
(b) availability of sufficient data from which such a record can be constructed. She also makes discreet inquiries from few clients of the branch engaged in similar line of
The first step in such an investigation is to establish the different items of inventory defalcated and their activity regarding credit worthiness of company, its promoters and directors.
quantities by checking physically the quantities in inventory held and those shown by the Inventory Based on above:
Book. (i) Identify activity being performed by CA Rajul and discuss its nature.
Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be verified (ii) Would your answer be different if this activity was to be performed by a person not qualified
by reference to entries in the Goods Inward and Outward Registers and the documentary evidence as a Chartered Accountant? Can a non-CA perform such activity? State reason.
as regards purchases and sales. This would reveal the particulars of inventory not received but paid
(iii) Name any three other areas where identified activity can be undertaken. (MTP 6 Marks
for as well as that issued but not charged to customers. Further, entries in respect of returns, both
April ’23, RTP May’23, New SM)
inward and outward, recorded in the financial books should be checked with corresponding entries in
the Inventory Book. Also, the totals of the Inventory Book should be checked. Finally, the shortages Answer 11
observed on physical verification of inventory should be reconciled with the discrepancies observed i. The activity described in the situation is Due diligence. Due diligence is a measure of prudence
on checking the books in the manner mentioned above. In the case of an industrial concern, issue of activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable
raw materials, stores and tools to the factory and receipts of manufactured goods in the godown also and prudent person under the particular circumstance, not measured by any absolute standard but
should be verified with relative source documents. Defalcations of inventory, sometimes, also are depending upon the relative facts of the case. It involves a careful study of financial and non-
committed by the management, by diverting a part of production and the consequent shortages in financial possibilities. It implies a general duty to take care in any transaction.
production being adjusted by inflating the wastage in production; similar defalcations of inventories
Due diligence is a process of investigation, performed by investors, into the details of a potential
and stores are covered up by inflating quantities issued for production. For detecting such shortages,
investment such as an examination of operations and management and the verification of material
the investigating accountant should take assistance of an engineer.
facts. It entails conducting inquiries for the purpose of timely, sufficient and accurate disclosure
For that he will be more conversant with factors which are responsible for shortage in production of all material statements/information or documents, which may influence the outcome of the
and thus will be able to correctly determine the extent to which the shortage in production has been transaction. Due diligence involves a careful study of the financial as well as non-financial
inflated. In this regard, guidance can also be taken from past records showing the extent of wastage possibilities for successful implementation of restructuring plans.
in production in the past. Similarly, he would be able to better judge whether the material issued for
Due diligence involves an analysis carried out before acquiring a controlling interest in a
production was excessive and, if so to what extent. The per hour capacity of the machine and the time
company to determine that the conditions of the business conform with what has been presented
that it took to complete one cycle of production, also would show whether the issues have been larger
about the target business. Also, due diligence can apply to recommendation for an investment or
than those required.
advancing a loan/credit.
ii. There would be no difference in answer if above activity was to be performed by a person who
is not a Chartered Accountant. The activity would remain due diligence. Due diligence can be
performed by any person. It is not necessary that due diligence can only be carried out by a
Chartered Accountant.
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As due diligence involves exercise of prudence and general duty to take care in any transaction, Forensic Accounting Audit
it can be undertaken by any person.
iii. The areas where due diligence may be undertaken are: - • In response to an event
• Mandatory
(1) Corporate restructuring. • Financial investigation
• Measures compliance with reporting standards
(2) Venture capital financing. • Finding used as evidence in court
• Obtain reasonable assurance that financial statements
or to resolve disputes
(3) Public offerings. are free of material misstatement in practice, there are
difference in mind set between forensic accounting and
audit
Question 12
• “Investigative mentality” vs. “Professional
ABC Ltd. is a listed company having turnover of Rs.50 crores & plans expansion by installation
scepticism”. A forensic accountant will often require
of new machines at new building-having total additional project cost of Rs.20 crore.
more extensive corroboration.
Rupees (In crore) Purpose • A forensic accountant may focus more on seemingly
10.0 - for Building immaterial transactions.
8.5 - for Machinery
A forensic accountant will often look for indications of fraud that are not subject to the scope of a
1.5 - for Working Capital financial statement audit.
20 Crore
Project gets implemented in 2017-18 and one of the accountants points out to Managing Director Question 13
that something wrong has happened in the purchase of building material. A nationalized bank received an application from an export company seeking sanction of a term loan
On hearing this, the management is planning to appoint Forensic Auditor Accountant. Advise to expand the existing sea food processing plant. In this connection, the General Manager, who is
management that how is a forensic accounting analysis is different from an audit. (RTP May 18) in charge of Advances, approaches you to conduct a thorough investigation of this limited company
and submit a confidential report based on which he will decide whether to sanction this loan or not.
Answer 12
List out the points you will cover in your investigation before submitting your report to the
Difference between a forensic accounting analysis and an audit: The general public believes that
General Manager. (RTP Nov 18, RTP May 20)
a financial auditor would detect a fraud if one were being perpetrated during the financial auditor’s
audit. The truth, however, is that the procedures for financial audits are designed to detect material Answer 13
misstatements, not immaterial frauds. While it is true that many of the financial statements and frauds Investigation on Behalf of the Bank for Advances: A bank is primarily interested in knowing the
could have, perhaps should have, been detected by financial auditors, the vast majority of frauds could purpose for which a loan is required, the sources from which it would be repaid and the security
not be detected with the use of financial audits. Reasons include the dependence of financial auditors that would be available to it, if the borrower fails to pay back the loan. On these considerations, the
on a sample and the auditors’ reliance on examining the audit trail versus examining the events’ and investigating accountant, in the course of his enquiry, should attempt to collect information on the
activities behind the documents. The latter is simply resource prohibitive in terms of costs and time. under mentioned points:
There are some basic differences today between the procedures of auditor accountant and those of (i) The purpose for which the loan is required and the manner in which the borrower proposes to
financial auditors. In comparison, forensic accounting and audit differ in specific ways, as shown invest the amount of the loan.
below:
• The schedule of repayment of loan submitted by the borrower, particularly the assumptions made
therein as regards amounts of profits that will be earned in cash and the amount of cash that
would be available for the repayment of loan to confirm that they are reasonable and valid in the
circumstances of the case. Institutional lenders now-a-days rely more for payment of loans on the
reliability of annual profits and loss on the values of assets mortgaged to them.

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• The financial standing and reputation for business integrity enjoyed by directors and officers of (i) Sales to Average Inventories held.
the company. (ii) Sales to Fixed Assets.
Sr.
Particulars Other Audits Forensic Audit (iii) Equity to Fixed Assets.
No.
1. Express an opinion as to Whether fraud has taken (iv) Current Assets to Current Liabilities.
Objectives
‘True & Fair’ presentation place in books (v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
2. Substantive & Compliance. Investigative, substantive or (vi) Equity to Long Term Loans.
Techniques
Sample based in depth checking
(vii) Sales to Book Debts.
3. Normally for a particulars
Period No such limitations (viii) Return on Capital Employed.
accounting period.
4. Verification of stock, Independent/verification of (c) Enter in a separate part of the statement the break-up of annual sales product-wise to show their
Relies on the management trend.
Estimation realizable value suspected/selected items
certificate/Management
of assets, provisions, liability where misappropriation in Steps involved in the verification of assets and liabilities included in the Balance Sheet of the
Representation
etc. suspected borrower company which has been furnished to the Bank - The investigating accountant should
5. Used to vouch the arithmetic Regulatory & propriety of prepare schedules of assets and liabilities of the borrower and include in the particulars stated
Off balance sheet items (like
accuracy & compliance with these transactions/contracts below:
contracts etc.)
procedures. are examined. (a) Fixed assets - A full description of each item, its gross value, the rate at which depreciation has
6. Legal determination of fraud been charged and the total depreciation written off. In case the rate at which depreciation has been
Negative opinion or qualified
impact and identification of adjusted is inadequate, the fact should be stated. In case any asset is encumbered, the amount
Adverse findings if any opinion expressed with/
perpetrators depending on of the charge and its nature should be disclosed. In case an asset has been revalued recently, the
without quantification
scope. amount by which the value of the asset has been decreased or increased on revaluation should
be stated along with the date of revaluation. If considered necessary, he may also comment on
• Whether the company is authorised by the Memorandum or the Articles of Association to
the revaluation and its basis.
borrow money for the purpose for which the loan will be used.
(b) Inventory - The value of different types of inventories held (raw materials, work-in- progress
• The history of growth and development of the company and its performance during the past 5 years.
and finished goods) and the basis on which these have been valued.
• How the economic position of the company would be affected by economic, political and social
Details as regards the nature and composition of finished goods should be disclosed. Slow-
changes that are likely to take place during the period of loan.
moving or obsolete items should be separately stated along with the amounts of allowances,
To investigate the profitability of the business for judging the accuracy of the schedule of if any, made in their valuation. For assessing redundancy, the changes that have occurred in
repayment furnished by the borrower, as well as the value of the security in the form of assets of important items of inventory subsequent to the date of the Balance Sheet, either due to conversion
the business already possessed and those which will be created out of the loan, the investigating into finished goods or sale, should be considered.
accountant should take the under-mentioned steps:
If any inventory has been pledged as a security for a loan the amount of loan should be disclosed.
(a) Prepare a condensed income statement from the Statement of Profit and Loss for the previous
(c) Trade Receivables, including bills receivable - Their composition should be disclosed to
five years, showing separately therein various items of income and expenses, the amounts of
indicate the nature of different types of debts that are outstanding for recovery; also whether the
gross and net profits earned and taxes paid annually during each of the five years. The amount
debts were being collected within the period of credit as well as the fact whether any debts are
of maintainable profits determined on the basis of foregoing statement should be increased by
considered bad or doubtful and the provision if any, that has been made against them.
the amount by which these would increase on the investment of borrowed funds.
Further, the total amount outstanding at the close of the period should be segregated as follows:
(b) Compute the under-mentioned ratios separately and then include them in the statement to show
the trend as well as changes that have taken place in the financial position of the company: (i) debts due in respect of which the period of credit has not expired;

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(ii) debts due within six months; and Question 14

(iii) debts due but not recovered for over six months. (a) General objective of an audit is to find out whether the financial statements show true and
If any debts are due from directors or other officers or employees of the company, the particulars fair view.
thereof should be stated. Amounts due from subsidiary and affiliated concerns, as well as those On the other hand, investigation implies systematic, critical and special examination of the
considered abnormal should be disclosed. The recoveries out of various debts subsequent to the records of a business for a specific purpose.
date of the Balance sheet should be stated. In view of the above, you are required to brief out the difference between Audit and
(d) Investments - The schedule of investments should be prepared. It should disclose the date Investigation. (Old & New SM)
of purchase, cost and the nominal and market value of each investment. If any investment is (b) Beta Ltd. is anticipating taking over a manufacturing concern and appoints you for
pledged as security for a loan, full particulars of the loan should be given. duediligence review. While reviewing, it requests you to look specifically for any hidden
(e) Secured Loans - Debentures and other loans should be included together in a separate schedule. liabilities and overvalued assets. State in brief the major areas you would examine for hidden
Against the debentures and each secured loan, the amounts outstanding for payments along with liabilities and overvalued assets. (RTP Nov 19)
due dates of payment should be shown. In case any debentures have been issued as a collateral Answer 14
security, the fact should be stated. Particulars of assets pledged or those on which a charge has (a) Etymologically, auditing and investigation are largely overlapping concepts because auditing is
been created for re - payment of a liability should be disclosed. nothing but an investigation used in a broad sense. Both auditing and investigation are fact finding
(f) Provision of Taxation - The previous years up to which taxes have been assessed should be techniques but their basic nature and objectives differ as regards scope, frequency, basis, thrust,
ascertained. If provision for taxes not assessed appears in be inadequate, the fact should be depth and conclusiveness. Audit and investigation differ in objectives and in their nature. Auditing
stated along with the extent of the shortfall. is general while investigation is specific.
(g) Other Liabilities - It should be stated whether all the liabilities, actual and contingent, are
Basis of Difference Investigation Audit
correctly disclosed. Also, an analysis according to ages of trade payables should be given to
(i) Objective An investigation aims at establishing The main objective of an audit
show that the company has been meeting its obligations in time and has not been depending on
a fact or a happening or at assessing a is to verify whether the financial
trade credit for its working capital requirements.
particular situation. statements display a true and fair
(h) Insurance - A schedule of insurance policies giving details of risks covered, the date of payment view of the state of affairs and the
of last premiums and their value should be attached as an annexure to the statements of assets, working results of an entity.
together with a report as to whether or not the insurance- cover appears to be adequate, having (ii) Scope The scope of investigation may be The scope of audit is wide and in case
regard to the value of assets. governed by statute or it may be non- of statutory audit the scope of work
(i) Contingent Liabilities - By making direct enquiries from the borrower company, from statutory. is determined by the provisions of
members of its staff, perusal of the files of parties to whom any loan has been advanced those relevant law.
of machinery suppliers and the legal adviser, for example, the investigating accountant should (iii) Periodicity The work is not limited by rigid time The audit is carried on either quarterly,
ascertain particulars of any contingent liabilities which have not been disclosed. In case, there frame. It may cover several years, as half- yearly or yearly.
are any, these should be included in a schedule and attached to the report. the outcome of the same is not certain.
(j) The impact on economic position of the company by economic, political and social changes (iv) Nature Requires a detailed study and Involves tests checking or sample
those are likely to take place during the period of loan. examination of facts and figures. technique to draw evidences for
forming a judgement and expression
Finally, the investigating accountant should ascertain whether any application for loan to another
of opinion.
bank or any other party has been made. If so, the result thereof should be examined.
(v) Inherent No inherent limitation owing to its Audit suffers from inherent limitation.
Limitations nature of engagement.

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(vi) Evidence It seeks conclusive evidence. Audit is mainly concerned with • Future lease liabilities.
primafacie evidence. • Environmental problems/claims/third party claims.
(vii) Observance It is analytical in nature and requires a Is governed by Compliance with • Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.
of Accounting thorough mind capable of observing, Generally accepted accounting
• Huge labour claims under negotiation when the labour wage agreement has already expired.
Principles collecting and evaluating facts. principles, audit procedures and
disclosure requirements. • Contingent liabilities not shown in books.
(viii) Reporting The outcome is reported to The outcome is reported to the owners Regularly Overvalued Assets:
the person(s) on whose behalf of the business entity. The auditor shall have to specifically examine the following areas:
investigation is carried out.
(b) Major areas to examine in course of Due Diligence Review: ‘Due Diligence’ is a term that is
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
often heard in the corporate world these days in relation to corporate restructuring. The purpose of
packing materials etc. with name of company.
due diligence is to assist the purchaser or the investor in finding out all he can, reasonably about the
business he is acquiring or investing in prior to completion of the transaction including its critical • Underused or obsolete Plant and Machinery and their spares; asset values which have been
success factors as well as its strength and weaknesses. impaired due to sudden fall in market value etc.
Due diligence is an all pervasive exercise to review all important aspects like financial, legal, • Assets carried at much more than current market value due to capitalization of expenditure/foreign
commercial, etc. before taking any final decision in the matter. As far as any hidden liabilities or exchange fluctuation, or capitalization of expenditure mainly in the nature of revenue.
overvalued assets are concerned, this shall form part of such a review of Financial Statements. • Litigated assets and property.
Normally, cases of hidden liabilities and overvalued assets are not apparent from books of accounts
• Investments carried at cost though realizable value is much lower.
and financial statements.
• Investments carrying a very low rate of income / return.
Review of financial statements does not involve examination from the view point of extraordinary
items, analysis of significant deviations, etc. • Infructuous project expenditure/deferred revenue expenditure etc.
However, in order to investigate hidden liabilities, the auditor should pay his attention to the following • Group Company balances under reconciliation etc.
areas: • Intangibles of no value.
• The company may not show any show cause notices which have not matured into demands, as
contingent liabilities. These may be material and important.
Question 15
• The company may have given “Letters of Comfort” to banks and Financial Institutions. Since
Important issues to be kept in mind by the investigator while preparing his report. (RTP May 21)
these are not “guarantees”, these may not be disclosed in the Balance sheet of the target company.
Answer 15
• The Company may have sold some subsidiaries/businesses and may have agreed to take over and
indemnify all liabilities and contingent liabilities of the same prior to the date of transfer. These The important issues to be kept in mind by the investigator while preparing his report are as
may not be reflected in the books of accounts of the company. follows:
• Product and other liability claims; warranty liabilities; product returns/discounts; liquidated (i) The report should not contain anything which is not relevant either to highlight the nature of the
damages for late deliveries etc. and all litigation. investigation or the final outcome thereof.
• Tax liabilities under direct and indirect taxes. (ii) Every word or expression used should be properly considered so that the possibility of arriving
at a different meaning or interpretation other than the one intended by the investigator can be
• Long pending sales tax assessments.
minimized.
• Pending final assessments of customs duty where provisional assessment only has been completed.
(iii) Relevant facts and conclusions should be properly linked with evidence.
• Agreement to buy back shares sold at a stated price.

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Question 17
(iv) Bases and assumptions made should be explicitly stated. Reasonableness of the bases and
assumptions made should be well examined and care should be taken to see that none of the Write a short note on the following: Example of Headings of a Due Diligence Report. (RTP Nov ’21)
bases and assumptions can be considered to be in conflict with the objective of the investigation. Answer 17
For example, in an investigation into over-stocking of raw materials, inventories and spares etc.
(a) Example of Headings of a Due Diligence Report
it should not be assumed that the ordering levels indicated on bin cards provide fair guidance
about acquisition of further materials. Also, since investigation is a fact -finding assignment, a. Executive Summary
assumptions should be made only when it is unavoidably necessary. b. Introduction
(v) The report should clearly spell out the nature and objective of the assignment accepted its scope c. Background of Target company
and limitations, if any.
d. Objective of due diligence
(vi) The report should be made in paragraph form with headings for the paragraphs. Any detailed
e. Terms of reference and scope of verification
data and figures supporting any finding may be given in Annexures.
f. Brief history of the company
(vii) The report should also state restrictions or limitations, if any, imposed on the instructions given
by the client. Preferably the reasons for placing such restrictions and their impact on the final g. Share holding pattern
result should also be stated. h. Observations on the review
(viii) The opinion of the investigator should appear in the final paragraph of the report. i. Assessment of management structure
j. Assessment of financial liabilities
Question 16 k. Assessment of valuation of assets
Technology based /Digital Forensics Techniques (RTP May 21) l. Comments on properties, terms of leases, lien and encumbrances.
Answer 16 m. Assessment of operating results
Technology based/Digital Forensics Techniques: Every transaction leaves a digital footprint in n. Assessment of taxation and statutory liabilities
today’s computer-driven society. Close scrutiny of relevant emails, accounting records, phone logs o. Assessment of possible liabilities on account of litigation and legal proceedings against the company
and target company hard drives is a requisite facet of any modern forensic audit accounting. Before
p. Assessment of net worth
taking steps such as obtaining data from email etc. the forensic auditor accountant should take
appropriate legal advice so that it doesn’t amount to invasion of privacy. Digital investigations can q. Interlocking investments and financial obligations with group / associates companies, amounts
become quite complex and require support from trained digital investigators. However, many open- receivables subject to litigation, any other likely liability which is not provided for in the books of
source digital forensics tools are now available to assist in this phase of the investigation . account
r. SWOT Analysis
• Cross Drive Analysis • EnCase
s. Comments on future projections
• Live Analysis • MD5
t. Status of charges, liens, mortgages, assets and properties of the company
• Deleted Files • Tracking Log File
u. Suggestion on ways and means including affidavits, indemnities, to be executed to cover unforeseen
• Stochastic Forensics • PC System Log
and undetected contingent liabilities
• Steganography • Free Log Tools
v. Suggestions on various aspects to be taken care of before and after the proposed merger/acquisition.

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Question 18 been determined by him. This will also be of immense help to the investigator in correlating facts
CA. Kushal has been appointed as an Investigator by M/s. XYZ and Associates. While and events and later in drafting the report.
undertaking this assignment of investigation, the subordinate staff of CA. Kushal inqui red
about the following issues:
Question 19
(i) Whether an investigator is required to undertake the cent per cent verification approach or
Write a short note on the following: Services rendered by Forensic Auditors .(RTP Nov’22)
whether he can adopt selective verification?
Answer 19
(ii) Whether an investigator necessarily requires assistance of expert?
(a) Services rendered by Forensic Auditors are:
(iii) Whether an investigator can retain working papers or not?
• Crafting questions to be posed
Guide CA. Kushal in solving the queries raised by his sub-ordinate staff. (RTP Nov ’23)
• Responding to questions posed
Answer 18
• Identifying documents to be requested and/or subpoenaed
Investigations broadly range between two extremes; on the one hand there are those in respect of which
complete accounts, documents, records and other information are available, and on the other, those • Identifying individuals to be most knowledgeable of facts
in respect of which little information, besides published accounts and statistical data, is available. • Conducting research relevant to facts of the case
Then again, investigation may cover the whole of accounting or may relate to only a part or parts of
• Identifying and preserving key evidence
accounting as may be specified. Some more issues often arise in investigation. They are stated below:
• Evaluating produced documentation and information for completeness
(a) Whether an investigator is required to undertake a cent per cent verification approach or
whether he can adopt selective verification - The answer to this question depends on the exact • Analysing produced records and other information for facts
circumstances of the case under investigation. If the investigator has to establish the amount of • Identifying alternative means to obtain key facts and information
cash defalcated by the cashier, he has probably no option but to carefully examine all the cash • Providing questions for deposition and cross examination of fact and expert witnesses
vouchers and related records. On the other hand, if he is to arrive at the profitability of a concern,
he may verify constituent transactions on a selective basis taking extreme care to see that no
material transaction that affects profit has remained concealed from his eyes. In investigation, it Question 20
is always safer to go by statistically recognised sampling methods than to depend on the so-called
Explain how a Forensic Audit Accounting differs from an Assurance Engagement. (PYP 4
“test checks” where circumstances permit selective verification.
Marks, May ’18)
(b)Whether an investigator necessarily requires assistance of expert - Often an investigator may
Answer 20
feel the necessity of obtaining views and opinions of experts in various fields to properly conduct
the investigation. It would be therefore, proper for the investigator to get the written general consent Difference between Forensic Audit Accounting and Assurance Engagement:
of his client, to refer special matters for views of different experts at the beginning of investigation Sr.
Particulars Assurance Engagement Forensic Audit Accounting
and he should settle the question of costs for obtaining the views and other related implications. No.
(c) Whether to retain working papers or not - Another important precaution is that the investigating 1. Objectives Express an opinion as to ‘True Whether fraud has taken place
accountant should retain in his files full notes of the work carried out, copies of schedules and all & Fair presentation in books
working papers, annexures, facts, figures, record of conversations and the like. Also, the working 2. Techniques Substantive & Compliance. Investigative, substantive or
papers should link up the figures as shown by the books of business with the final figures produced Sample based in depth checking
by the investigating accountant. Wherever required the investigator should take representation letter 3. Period Normally for a particulars No such limitations
from the appointing authority. In the absence thereof, he would not be able to explain the figures accounting period.
when he is called upon to give evidence in a court of law to support his figures; for quite often the
conclusions of the accountant are challenged by parties whose interest is adversely affected by his
findings, for example, when the value of shares of a company taken over by the Government has
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4. Verification of stock, Relies on the management Independent / verification Question 22

Estimation realizable value c e r t i f i c a t e / M a n a g e m e n t of suspected/selected items You have been appointed as a forensic accountant in M/s Secure Ltd. to carryout various analysis
of assets, provisions, liability Representation where misappropriation in as a part of your assignment to arrive at a particular result. Specify the various analysis which
etc. suspected might have to be carried out by you to arrive at your result. (PYP 5 Marks, May ‘19)
5. Off balance sheet items (like Used to vouch the arithmetic Regulatory & propriety of Answer 22
contracts etc.) accuracy & compliance with these transactions/contracts Perform the Analysis: The actual analysis performed will be dependent upon the nature of the
procedures. are examined. assignment and may involve:
6. Adverse findings if any Negative opinion or qualified Legal determination of fraud
(i) calculating economic damages;
opinion expressed with/ impact and identification of
without quantification perpetrators depending on (ii) summarizing a large number of transactions;
scope. (iii) performing a tracing of assets;
(iv) performing present value calculations utilizing appropriate discount rates;
Question 21
(v) performing a regression or sensitivity analysis;
The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in
(vi) utilizing a computerized application such as a spread sheet, data base or computer model; and
material consumption. As an Auditor entrusted with investigating the causes for this poor state,
what may be the areas of your focus in this respect. (PYP 4 Marks, Nov ‘18) (vii) utilizing charts and graphics to explain the analysis.
Answer 21
Decreasing Operating Efficiency in Material Consumption: It is the input-output ratio. In the case Question 23
of public spending, efficiency is achieved when the output is maximized at the minimum of inputs, or MF. Ltd., engaged in the manufacturing of various products in its factory, is concerned with
input is minimized for any given quantity and quality of output. shortage in production and there arose suspicion of inventory fraud. You are appointed by MF
• The auditor should make an analytical procedure to compare the material consumption with output Ltd. To evaluate the options for verifying the process to reveal fraud and the corrective action
for the current year as well as previous years. to be taken. As an investigating accountant what will be your areas of verification and the
• The internal control system should be studied. procedure to be followed for verification of defalcation of inventory? (PYP 4 Marks, Nov ‘19)
• The auditor should have discussions/ inquiry with different personnel of the company including Answer 23
production personnel. Inventory frauds - Inventory frauds are many and varied but here we are concerned with
• The production process, scheduling, machine usage, material mix should be studied. misappropriation of goods and their concealment.
• A reconciliation of variation as to various causes – Price, quantity efficiency are to be analyzed. (i) Employees may simply remove goods from the premises.
• The budget, standard coasting and other MIS reports should be called for and studied. (ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
• Internal audit report should be thoroughly studied and whether any pilferage, fraud etc. were (iii) Inventory records may be manipulated by employees who have committed theft so that book
noticed. These are to be looked into. quantities tally with the actual quantities of inventories in hand.
• The key material should be picked up for detailed study of their ordering, receipts, issue, normal Verification Procedure for Defalcation of inventory - Such thefts usually are possible through
loss yield percentage etc. collusion among a number of persons. Therefore, for their detection, the entire system of receipts,
storage and despatch of all goods, etc. should be reviewed to localize the weakness in the system.
The determination of factors which have been responsible for the theft and the establishment of guilt
would be difficult in the absence of:

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(a) a system of inventory control, and existence of detailed record of the movement of inventory, or 3. Nevertheless, it would be prudent to see first that such accounts were prepared with objectivity
(b) availability of sufficient data from which such a record can be constructed. and that no bias has crept in to give advantage to the person on whose behalf these were prepared.
The step in such an investigation is to establish the different items of inventory defalcated and their quantities Whether the investigator can put reliance on the already audited statement of account - If the
by checking physically the quantities in inventory he ld and those shown by the Inventory Book. investigation has been launched because of some doubt in the audited statement of account, no question
of reliance on the audited statement of account arises. However, if the investigator has been requested
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part
to establish value of a business or a share or the amount of goodwill payable by an incoming partner,
of production and the consequent shortages in production being adjusted by inflating the wastage in
ordinarily the investigator would be entitled to put reliance on audited materials made available to him
production; similar defalcations of inventories and stores are covered up by inflating quantities issued
unless, in the course of his test verification, he finds the audit to have been carried on very casually or
for production. For detecting such shortages, the investigating accountant should take assistance of
unless his terms of appointment clearly require t o test everything afresh.
an engineer. For that he will be more conversant with factors which are responsible for shortage in
production and thus will be able to correctly determine the extent to which the shortage in production
has been inflated. Question 25
In this regard, guidance can also be taken from past records showing the extent of wastage in production M/s GSB Limited is into the business of construction for the past 25 years. Management of the
in the past. Similarly, he would be able to better judge whether the material issued for production was Company came to know that building material sent to construction sites are of substandard
excessive and, if so to what extent. quality whereas the payment released by the accounts department of the Company are on the
The per hour capacity of the machine and the time that it took to complete one cycle of production, higher side. Forensic Auditor Accountant was asked to carry out detailed investigation. Forensic
also would show whether the issues have been larger than those required. Auditor Accountant completed his investigation and now preparing his report. What are the
broad areas of information that needs to be incorporated in the report of Forensic Auditor
Accountant? (PYP 4 Marks July 21)
Question 24
Answer 25
Milk Ltd. is engaged in the business of manufacturing and distribution of various milk products
Broad areas of information to be incorporated in the report of Forensic Auditor Accountant -
like cheese, curd, paneer, etc. Government made certain changes in rules and regulations
relating to this sector, consequently management decided to go for expansion. Management was Issuing an audit report is the final step of a fraud audit. Auditors will include information detailing
looking for some financial investor, who can fund some part of the proposed expansion. Mr. X is the fraudulent activity, if any has been found. The client will expect a report containing the findings
interested in the venture and appoints you to act as an advisor to the proposed investment in the of the investigation, including a summary of evidence, a conclusion as to the amount of loss suffered
business of Milk Ltd. You have to investigate the audited financial statements and ensure that the as a result of the fraud and to identify those involved in fraud. The report may include sections on
valuation of shares of the company on the basis of audited financial statements is appropriate. the nature of the assignment, scope of the investigation, approach utilized, limitations of scope and
What process will be used for checking and whether you can put reliance on already audited findings and/or opinions.
statement of accounts? (PYP 5 Marks July 21) The report will include schedules and graphics necessary to properly support and explain the findings.
Answer 24 The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
were circumvented. It is also likely that the investigative team will recommend improvements to
Process used for checking and reliance on already audited statement of accounts -
controls within the organization to prevent any similar frauds occurring in the future. The Forensic
Following process may be carried out- Auditor Accountant should have active listening skills which will enable him to summarize the facts
1. If the statements of account produced before the investigator were not audited by a qualified in the report. It should be kept in mind that the report should be based on the facts assimilated during
accountant, then of course there arises a natural duty to get the figures in the accounts properly the process and not on the opinion of the person writing the report.
checked and verified.
2. However, when the accounts produced to the investigator have been specially prepared by a
professional accountant, who knows or ought to have known that these were prepared for purposes
of the investigation, he could accept them as correct relying on the principle of liability to third
parties.
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Question 26 ABC Ltd. is a listed company having turnover of ` 50 crores & plans expansion by installation
TQR Limited is engaged in the business of garment manufacturing having registered office at of new machines at new building-having total additional project cost of ` 20 crore.
Mumbai and branches across India. Mr. Shyam, one of the senior Managers was involved in Rupees (In crore) Purpose
creating false documents and legitimate documents were altered to support fictitious transactions. 10.0 - for Building
Consequently, the management appointed you to get Forensic Audit Accounting done based on 8.5 - for Machinery
the digital foot-print of transactions handled by Mr. Shyam. The use of sound techniques will 1.5 - for Working Capital
enable to discover the defalcations on a timely basis. As a Forensic Auditor Accountant how will
20 Crore Total
you deal and suggest Technology based/Digital forensic techniques. (PYP 5 Marks May ‘22)
Project gets implemented in 2019-20 and one of the accountants report to the Managing Director
Answer 26
that some suspicious transactions are noticed in the purchase of building material. But the
Technology based /Digital Forensics Techniques: Every transaction leaves a digital footprint in Management is confused as to whether they should get an audit or Forensic Audit Accounting
today’s computer-driven society. Close scrutiny of relevant emails, accounting records, phone logs done for the same. Advise Management about the difference in forensic accounting and audit.
and target company hard drives is a requisite facet of any modern Forensic Audit Accounting. (Old & New SM)
Before taking steps such as obtaining data from email etc. the Forensic Auditor Accountant should Answer 27
take appropriate legal advice so that it doesn’t amount to invasion of privacy.
Difference between forensic audit and other audit is as under:
Digital investigations can become quite complex and require support from trained digital investigators.
Sr.
Many open-source digital forensics tools are now available to assist you in this phase of the investigation. Particulars Other Audits Forensic Audit
No.
(i) Cross Drive Analysis (ii) Live Analysis (iii) Deleted Files 1. Express an opinion as to Whether fraud has taken
Objectives
(iv) Stochastic Forensics (v) Steganography (vi) EnCase ‘True & Fair’ presentation place in books
(vii) MD5 (viii) Tracking Log Files (ix) PC System Log 2. Substantive & Compliance. Investigative, substantive or
Techniques
Sample based in depth checking
(x) Free Log Tools
3. Normally for a particulars
Period No such limitations
accounting period.
Question 27 4. Verification of stock, Independent/verification of
Relies on the management
You have been requested to carry out a forensic audit of a listed entity by the Board of Directors, Estimation realizable value suspected/selected items
certificate/Management
based on a whistle blower complaint received. Before the commencement of the forensic audit, of assets, provisions, liability where misappropriation in
Representation
you and your team, are discussing the various aspects relating to the scope and the procedures etc. suspected
to be carried out. 5. Used to vouch the arithmetic Regulatory & propriety of
Off balance sheet items (like
What would be the items of discussion with respect to the differences between forensic audit and accuracy & compliance with these transactions/contracts
contracts etc.)
other audit? (PYP 4 Marks Nov 22) procedures. are examined.
6. Legal determination of fraud
OR Negative opinion or qualified
impact and identification of
Shipra recently qualified as a Chartered Accountant and started her own practice. One of her Adverse findings if any opinion expressed with/
perpetrators depending on
friends told her that Forensic Audit Accounting is a new area and has a lot of potential in terms without quantification
scope.
of professional opportunities and remuneration. Seema said that there is nothing new in this as
ultimately Forensic Audit Accounting is also like other audits. Do you agree with the views of
Seema? Support your answer with relevant explanation. (RTP May 22)
OR

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Question 28 ACT Silk Industries is a leading textile manufacturing listed company. In the course of evidence
AB Ltd wants to acquire a unit of CT Ltd. AB Ltd is uncertain about the future viability of the collection and analysis, it was observed that the company is involved in siphoning of funds
unit under consideration. You are appointed to investigate economic and financial position of through payments to shell companies. Hence, SEBI appointed B & S Associates, Chartered
the unit. What are the factors that you shall consider while studying the economic and financial Accountants, as forensic auditors of the company. Enumerate in brief the steps to be taken by B
position of the business? (PYP 4 Marks May ’23, MTP 4 Marks Sep’23) & S Associates in forensic audit process. (PYP 5 Marks Dec ‘21)
Answer 28 Answer 29
For studying the economic and financial position of the business, the following should be The steps to be taken are as follows:
considered: • Step 1. Initialization-
i) The adequacy or otherwise of fixed and working capital. Are these sufficient for the growth of the It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the assignment.
business? It is helpful to meet the client to obtain an understanding of the important facts, players and issues at
ii) What will be the trend of the sales and profits in the future? Establishing the trend of sales, hand.
productwise and area-wise will ordinarily help in drawing a conclusion on whether the trend will A conflict check should be carried out as soon as the relevant parties are established. It is often useful
be maintained in the future. to carry out a preliminary investigation prior to the development of a detailed plan of action. This will
iii) Whether the profit which the business could be expected to maintain in the future would yield an allow subsequent planning to be based upon a more complete understanding of the issues.
adequate return on the capital employed? • Step 2. Develop Plan
iv) Whether the business is operating at its 100 percent capacity or improvements can be made to This plan will take into account the knowledge gained by meeting with the client and carrying out the
reach at full productivity? initial investigation and will set out the objectives to be achieved and the methodology to be utilized
to accomplish them.
• Step 3. Obtain Relevant Evidence
Question 29
Depending on the nature of the case, this may involve locating documents, economic information,
Enumerate the steps to be undertaken in case of Forensic Audit Accounting process. (Old &
assets, a person or company, another expert or proof of the occurrence of an event. In order to gather
New SM)
detailed evidence, the investigator must understand the specific type of fraud that has been carried
OR out, and how the fraud has been committed. The evidence should be sufficient to ultimately prove
PQR Ltd. Is a listed company having turnover of Rs. 50 crores & plans expansion by installation the identity of the fraudster(s), the mechanics of the fraud scheme, and the amount of financial loss
of new machines at new building-having total additional project cost of Rs. 20 crore. suffered. It is important that the investigating team is skilled in collecting evidence that can be used in
a court case within the stipulated time period, and in keeping a clear chain of custody until the evidence
Rupees (In crore) Purpose
is presented in court. If any evidence is inconclusive or there are gaps in the chain of custody, then
10.0 - for Building
the evidence may be challenged in court, or even become inadmissible. Investigators must be alert to
8.5 - for Machinery
documents being falsified, damaged or destroyed by the suspect(s).
1.5 - for Working Capital
• Step 4. Perform the analysis
20 Crore
The actual analysis performed will be dependent upon the nature of the assignment and may involve
Project gets implemented in 2017-18 and one of the accountants points out to Managing Director
that something wrong has happened in the purchase of building material. • calculating economic damages;
On hearing this, the management is planning to appoint Forensic Auditor. Advise the Forensic • summarizing a large number of transactions;
Auditor about the steps to be undertaken in case of forensic audit process. (MTP 5 Marks, Aug • performing a tracing of assets;
18)
• performing present value calculations utilizing appropriate discount rates;
OR

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• performing a regression or sensitivity analysis; • Out of the Box Thinking

• utilizing a computerized application such as a spread sheet, data base or computer model; and • Strong Visualization and Imagination
• utilizing charts and graphics to explain the analysis. • Curiosity
• Step 5. Reporting • Persistence
Issuing an audit report is the final step of a fraud audit. Auditors will include information detailing • Detail-oriented
the fraudulent activity, if any has been found. The client will expect a report containing the findings • Inquisitiveness
of the investigation, including a summary of evidence, a conclusion as to the amount of loss suffered
• Creativity
as a result of the fraud and to identify those involved in fraud. The report may include sections on
the nature of the assignment, scope of the investigation, approach utilized, limitations of scope an • Discretion
d findings and/or opinions. The report will include schedules and graphics necessary to properly • Skepticism
support and explain the findings.
• Confidence
The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
• Sound professional judgement
were circumvented. It is also likely that the investigative team will recommend improvements to
controls within the organization to prevent any similar frauds occurring in the future. • Objectivity and credibility
The Forensic Auditor Accountant should have active listening skills which will enable him to Skills - Forensic Auditor Accountant should possess
summarize the facts in the report. It should be kept in mind that the report should be based on the facts • Auditing standards, procedures and related methodologies
assimilated during the process and not on the opinion of the person writing the report.
• Accounting & Business reporting systems
• Step 6. Court proceedings
• Information Technology
The investigation is likely to lead to legal proceedings against the suspect, and members of the
• Data Analytics
investigative team will probably be involved in any resultant court case. The evidence gathered during
the investigation will need to be presented at court, and team members may be called to court to • Criminology
describe the evidence they have gathered and to explain how the suspect was identified. • Legal Framework
• Litigation processes & procedures
Question 30 • InvestigativeTechniques
BR Construction was into the business of building roads and other infrastructure facilities for • Evidence gathering
government contracts. Mr. Tiwari, one of the senior official, was looking after the procurement • Network of professional contacts in related fields’ viz. enforcement, regulatory bodies, law, industry,
of cement required at the construction sites. There was a substantial increase in the price of peers etc
cement bags bought as compared to those bought prior to the appointment of Mr. Tiwari.
The management of the company decides to get a Forensic Audit Accounting done for the
transactions handled by Mr. Tiwari. What points should be kept in mind by the management
while appointing a Forensic Auditor Accountant? (Old SM, MTP 4 Marks Apr’22)
Answer 30
While appointing a Forensic Auditor Accountant, the Management of BR Construction must initially
consider whether the firm has the necessary skills and experience to accept the work.
A Forensic Auditor should necessarily possess the following characteristics and skills:
Characteristics- Forensic Auditor Accountant

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Multiple Choice Questions (MCQs) (c) The procedures of the investigating accountant looks completely reasonable considering his scope
of work. Further, no changes are required in his work approach.
Question 1
(d) At the outset, it can be said that investigation in the given case was not required. However, even
ZARI & Associates is a partnership firm and has been in existence for the last 15 years. The
if the new partners decided to carry out the investigation it should have been limited to mainly
firm is engaged in consultancy business related to various areas and has built a good name for
inquiry procedures by the investigating accountant. The investigating accountant could have also
itself over the period.
reviewed the manner of computation of goodwill which doesn’t seem to have been performed on
Some of the clients of the firm are very old who have been continuing since its existence. The the basis of the above mentioned facts. (MTP 2 Marks, Oct 19)
business of the firm has gone through various phases some of them were very bad. But currently
Answer 1 : (c)
the business is going very well and the firm is looking to expand its operations into different
geographies. For this, the firm’s management decided that some of its senior partners will move
to new offices and new partners would be inducted. Question 2
A team of new partners is in discussion with the senior old partners regarding their joining the In accordance with provisions of Companies Act, 2013 with respect to investigation into the
firm. affairs of a company, who can be appointed as an inspector?
The new partners would be interested to know whether the terms offered to them are reasonable I. Raj & Associates, a firm
having regard to the nature of the business, profit records, capital distribution, personal
capacity of the existing partners, socio-economic setting etc. and whether they would be able to II. CA Rahul
derive continuing benefits in the shape of return of capital to be contributed and remuneration III. Mihim Pvt. Ltd, a body corporate
of services to be offered. In addition, they also want to ascertain whether the capital to be IV. ABC & Partners LLP, a body corporate
contributed by them would be safe and applied usefully or not.
(a) I, III & IV
For this purpose, an investigation of the business of the firm was set up on behalf of these
(b) I only
new partners. At the time of scrutiny of the record of profitability of the firm’s business, the
investigating accountant picked up records of last 4-5 years wherein he observed 2 years which (c) III & IV
were unusual because the profits during those 2 years were highly erratic and fluctuating. (d) II only (MTP 1 Marks, Oct 20)
The investigating accountant, therefore, went into the profits of last 7-8 years to iron out the
Answer 2 (d).
fluctuation. He also examined the provisions of the partnership deed particularly the composition
of partners, their capital contribution, drawing rights, retirement benefits and goodwill. He
also asked for details of jobs/ contracts in hand and the range of current clientele of the firm Question 3
for his examination. Some of these procedures of the investigating accountant were not found
The notes to the account statement of Nemi Ltd. shows the break-up of accounts payable for the
appropriate by the senior partners of the firm and they advised the investigating accountant not
Financial Year 2020-21 as follows:
to go beyond his scope. In the given situation, which of the following is correct:
Accounts Payable Amount (in `)
(a) The investigating accountant should not have asked for the records of the profits of last 7 -8 years
Mr. K 1,20,000
as that would be too much of the information for his review. Also the details of jobs/ contracts in
Mr. R 40,000
hand and the range of current clientele of the firm are confidential and hence does not get covered
in his scope. Mr. B 14,56,000
Total 16,16,000
(b) After finding 2 years which were unusual because the profits during those 2 years were highly
CA. Raju, the auditor of Nemi Ltd., wants to investigate the valuation of accounts payable of
erratic and fluctuating, the investigating accountant should have reported the matter to the new
Mr. B amounting to ` 14,56,000. Which of the following procedures is best fitted & more reliable
partners instead of asking for more details related to the profits of last 7-8 years. Also he is not
to be followed by CA. Raju to get more reliable evidence for the existence of such balance as on
required to examine the provisions of the partnership deed as these details would have already
31st March, 2021?
been discussed with the new partners and they would have checked that.

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(a) Inspect each and every journal entry passed in the books of Nemi Ltd. a) Report can include a section to identify those involved in fraud. This is recommendatory and in
(b) Ask Nemi Ltd. to provide the details of payment made during the year 2021-22. line with the appropriate practice of reporting.
(c) Inspect the invoices issued by Mr. B and the payments made. b) Report should not contain such details till the time it is proved in a court of law.
(d) Interrogate the cash manager of Nemi Ltd. (MTP 1 Mark Oct 21) c) Report can include a section to identify those involved in fraud but subject to prior approval of the
Board of Directors of the company.
Answer 3 (c)
d) Report should not include a section to identify those involved in fraud as it is not permitted under
SA 700. (MTP 1 Mark Sep ‘22)
Question 4 Answer 5 : (a)
Bhagwan & Co. has received an order in writing from the Central Government, in respect of one
of its clients, to carry out an investigation under section 210 of the Companies Act 2013. During
the course of carrying out investigation as above, Bhagwan & Co. requires certain evidence Question 6
from a place outside India in order to establish the correctness of an investment in the shares JIN Ltd. which is based in Mumbai, is in the business of manufacturing leather products since
of a company outside India. What should be the procedure of Bhagwan & Co. to seek evidence 1995 and wants to acquire OM Leathers Private Limited, which is based in Pune and engaged in
from outside India for the investigation? the business of selling leather products manufactured by different companies. Before acquisition
(a) Seeking evidence from outside India for investment in shares outside India is outside the scope of JIN Ltd. wants to get a due diligence review to be done of OM Leathers. JIN Ltd. appointed S &
investigation. S Associates for conducting overall due diligence of OM Leathers. During review, the accountant
asked OM Leathers to provide financial projections of the company for next five years, but OM
(b) An application is to be made to the competent court in India by the inspector and such court may
leathers refused to provide the same and claimed that financial projections are not part of due
issue a letter of request to a court or an authority in such country for seeking evidence.
diligence review.
(c) The evidence can be sought by electronic mail by writing to the concerned authorities of the
Whether the objection raised by the management of OM Leathers is correct? Give reason.
entity outside India.
(a) The objection raised by OM Leathers is correct, as due diligence doesn’t include review of financial
(d) Powers of seeking evidence outside India is available only to an investigator under section 212 -
projections.
Serious Fraud Investigation. (MTP 1 Mark April 22)
(b) The objection raised by OM Leathers is not correct, as due diligence refers to an examination of
Answer 4 : (b)
a potential investment to confirm all material facts of the prospective business which a company
wants to acquire and financial projection is a part of same.
Question 5 (c) The objection raised by OM Leathers is correct, as reviewer cannot comment on financial
projections in his report.
ABC & Co were appointed to conduct a Forensic Audit Accounting of XYZ Limited. After
successfully conducting the Forensic Audit Accounting, ABC & Co prepared its report for (d) The objection raised by OM Leathers is not correct, as the target company cannot refuse in
the appointing authority. A copy of the report was also shared with the Board of Directors of providing any information required by the reviewer. (MTP 1 Mark Oct 22)
the company. In the report, Forensic Auditors enumerated the findings of the investigation, Answer 6 : (b)
including a summary of the evidence, a conclusion as to the amount of loss suffered as a result of
the fraud and identification of those involved in fraud. The report also cover ed sections on the
nature of the assignment, scope of the investigation, approach utilized, limitations of scope and Question 7
opinions. Upon receiving the report, the Board of Directors raised objections as to how Forensic Which among the following are the skills to be possessed by M/s ABC & Associates as forensic
Audit Accountant can mention the names of those who are involved in fraud. You as a Forensic accountants?
Expert guide whether is it appropriate to mention the details of the person who are involved in
(a) Criminology and evidence gathering.
fraud in the final report.
(b) Confidence and curiosity.

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(c) Discretion and creativity. Question 1

(d) Inquisitiveness and persistence. (MTP 1 Mark April ’23) Sri Rajan is above 80 years old and wishes to sell his proprietary business of manufacture of
Answer 7 (a) specialty chemicals. Ceta Ltd. wants to buy the business and appoints you to carry out a due
diligence audit to decide whether it would be worthwhile to acquire the business.
What procedures you would adopt before you could render any advice to Ceta Ltd.?
Question 8
Answer 1
Suvrat & Co. Chartered Accountants, mainly into statutory audit and tax audit, is now exploring
If a full-fledged financial due diligence is conducted, it would include the following matters, inter alia,
the areas of due diligence and investigation assignments. During the course of due diligence, an
in its scope
articled assistant enquires to the principal whether it is required to verify the letter of comfort
given by the target company to a bank. You are required to guide the articled assistant regarding (a) Brief history of the target company and background of its promoters - The accountant should
whether letter of comfort given to banks by the target company needs to be reviewed as part of begin the financial due diligence review by looking into the history of the company and the
the financial due diligence. Choose the correct reasoning from below? background of the promoters.
(a) Yes, the objective of due diligence exercise will be to look specifically for any hidden liabilities The details of how the company was set up and who were the original promoters has to be gone into,
or over-valued assets and since, letter of comfort given to banks is a hidden liability, it should be before verification of financial data in detail. An eye into the history of the target company may reveal
reviewed. its turning points, survival strategies adopted by the target company from time to time, the market share
enjoyed by the target company and changes therein, product life cycle and adequacy of resources. It
(b) Yes, letter of comfort given to banks is a guarantee and will be disclosed in the notes to accounts
could also help the accountant in determining whether, in the past, any regulatory requirements have
of the financial statements and calls for verification and review.
had an impact on the business of the target company. Broadly, the accountant should make relevant
(c) No, due diligence involves the review of only disclosed assets and liabilities of the target company enquiries about the history of target’s business products, markets, suppliers, expenses, operations.
and hence, letter of comfort does not call for review. This could, inter alia, include the following:
(d) No, letter of comfort does not involve financial implications and hence it need not be reviewed as • Nature of business(es)
part of financial due diligence. (MTP 1 Mark Sep ’23)
• Location of production facilities, warehouses, offices.
Answer 8 (a)
• Employment
• Products or services and markets
Question 9
• History of the business with important suppliers of goods and services
Which among the following are the skills to be possessed by M/s ABC & Associates as forensic
• Inventories
auditor accountant?
• Franchises, licenses, patents.
(a) Criminology and evidence gathering.
• Important expense categories.
(b) Confidence and curiosity.
• Research and development.
(c) Discretion and creativity.
• Foreign currency assets, liabilities and transactions.
(d) Inquisitiveness and persistence. (RTP May 22)
• Legislation and regulation that significantly affect the entity.
Answer 9 : (a)
• Information systems.
(b) Accounting policies - The accountant should study the accounting policies being followed by the
target company and ascertain whether any accounting policy is inappropriate.

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The accountant should also see the effects of the recent changes in the accounting policies. The (d) Taxation - Tax due diligence is a separate due diligence exercise but since it is an integral component
target company might have changed its accounting policies in the recent past keeping in view its of the financial status of a company, it is generally included in the financial due diligence. It is
intention of offering itself for sale. important to check if the company is regular in paying various taxes to the Government. The
accountant has to also look at the tax effects of the merger or acquisition.
The overall scope has to be based on the accounting policies adopted by the management. The
accountant has to look at any material effect of accounting policies on the overall profitability (e) Cash Flow - A review of historical cash flows and their pattern would reflect the cash generating
and their correctness. It is reiterated that the accountant should have a detailed look at all material abilities of the target company and should highlight the major trends. It is important to know if
changes in Accounting Policies in the period subjected to review very carefully. the company is able to meet its cash requirements through internal accruals or does it have to seek
external help from time to time.
The accountant’s report should include a summary of significant accounting policies used by the
(f) Financial Projections - The accountant should obtain from the target company the projections
target company, that changes that have been made to the accounting policies in the recent past,
for the next five years with detailed assumptions and workings. He should ask the target company
the areas in which accounting policies followed by the target company are different from those
to give projections on optimistic, pessimistic and most likely bases.
adopted by the acquiring enterprise, the effect of such differences.
(g) Management and Employees - In most of the companies which are available for take over the
(c) Review of Financial Statements - Before commencing the review of each of the aspect covered problem of excess work force is often witnessed. It is important to work out how much of the
by the financial statements, the accountant should examine whether the financial statements of the labour force has to be retained. It is also important to judge the job profile of the administrative
target company have been prepared in accordance with the Statute governing the target company, and managerial staff to gauge which of these matches the requirements of the new incumbents.
Framework for Preparation and Presentation of the Financial Statements and the relevant Due to complex set of labour laws applicable to them, companies often have to face protracted
Accounting Standards. If not, the accountant should record the deviations from the above and litigation from its workforce, and it is important to gauge the likely impact of such litigation.
consider whether it warrant an inclusion in the final report on due diligence.
The assumptions regarding increase in salaries, interest rate, retirement etc. have to be gone into
After having an overall view of the financial statements, as mentioned in the above paragraphs, to see if they are reasonable. It is also necessary to see if the basic salary /wage considered for the
the accountant should review the operating results of the target company in great detail. It is valuation is correct and includes all elements subject to payment of Gratuity. In the case of PF,
important to make an evaluation of the profit reported by the target company. The reason being ESI etc. the accountant has to see if all eligible employees have been covered.
that the price of the target company would be largely based upon its operating results. It is very important to consider the pay packages of the key employees as this can be a crucial factor
The accountant should consider the presence of an extraordinary item of income or expense that in future costs. One has to carefully look at Employees Stock Option Plans; deferred compensation
might have affected the operating results of the target company. plans; Economic Value Addition and other performance linked pay; sales incentives that have
been promised etc. It is also important to identify the key employees who will not continue after
It is advisable to compare the actual figures with the budgeted figures for the period under review the acquisition either because they are not willing to continue or because they are to be transferred
and those of the previous accounting period. This comparison could lead the accountant to the to another company within the ‘group’ of the target company.
reasons behind the variations. It is important that the trading results for the past four to five years
(h) Statutory Compliance - During a due diligence this is one aspect that has to be investigated in
are compared and the trend of normal operating profit arrived at.
detail. It is important therefore, to make a list of laws/ statues that are applicable to the entity as
The normal operating profits should further be benchmarked against other similar companies. well as to make a checklist of compliance required from the company under those laws. If the
Besides the above, and based on the trend of operating results, the accountant has to advise the company has not been regular in its legal compliance it could lead to punitive charges under the
acquiring enterprise, through due diligence report, on the indicative valuation of the business. law. These may have to be quantified and factored into the financial results of the company.
In the case of many enterprises, the valuation is mainly based on the value of net worth only. For
valuation of immovable properties and plant, if required, the assistance of expert valuers could
Question 2
also to be taken.
An American Company engaged in the business of manufacturing and distribution of industrial
The exercise to evaluate the balance sheet of the target company has to take into consideration
gases, is interested in acquiring a listed Indian Company having a market share of more than
the basis upon which assets have been valued and liabilities have been recognised. The net worth
65% of the industrial gas business in India. It requests you to conduct a “Due Diligence” of this
of the business has to be arrived at by taking into account the impact of over/under valuation of
Indian Company and submit your Report. List out the contents of your Due Diligence Review
assets and liabilities.
Report that you will submit to your USA based Client.
The accountant should pay particular attention to the valuation of intangible assets.
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Answer 2 Question 3
The contents of a due diligence report will always vary with individual circumstances. Following KDK Bank Ltd., received an application from a pharmaceutical company for takeover of their
headings are illustrative: outstanding term loans secured on its assets, availed from and outstanding with a nationalized
Example of Headings of a Due Diligence Report bank. KDK Bank Ltd., requires you to make a due diligence audit in the areas of assets of
pharmaceutical company especially with reference to valuation aspect of assets. State what may
• Executive Summary
be your areas of analysis in order to ensure that the assets are not stated at overvalued amounts.
• Introduction
Answer 3
• Background of Target company
Over-Valued Assets:
• Objective of due diligence
• Terms of reference and scope of verification
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
• Brief history of the company packing materials etc. with name of company.
• Share holding pattern • Underused or obsolete Plant and Machinery and their spares; asset values which have been
• Observations on the review impaired due to sudden fall in market value etc.
• Assessment of management structure • Assets carried at much more than current market value due to capitalization of expenditure/foreign
exchange fluctuation, or capitalization of expenditure mainly in the nature of revenue.
• Assessment of financial liabilities
• Litigated assets and property.
• Assessment of valuation of assets
• Investments carried at cost though realizable value is much lower.
• Comments on properties, terms of leases, lien and encumbrances.
• Investments carrying a very low rate of income / return.
• Assessment of operating results
• Infructuous project expenditure/deferred revenue expenditure etc.
• Assessment of taxation and statutory liabilities
• Group Company balances under reconciliation etc
• Assessment of possible liabilities on account of litigation and legal proceedings against the company
• Intangible assets of no value.
• Assessment of net worth
• Interlocking investments and financial obligations with group / associates companies, amounts
receivables subject to litigation, any other likely liability which is not provided for in the books of Question 4
account “Due diligence is different from audit” – Explain the difference between due diligence and audit.
• SWOT Analysis Answer 4
• Comments on future projections It needs be underlined that due diligence is different from audit. Audit is an independent examination
• Status of charges, liens, mortgages, assets and properties of the company and evaluation of the financial statements on an organization with a view to express an opi nion thereon.
Whereas due diligence refers to an examination of a potential investment to confirms all material facts
• Suggestion on ways and means including affidavits, indemnities, to be executed to cover unforeseen
of the prospective business opportunity. It involves review of financial and non- financial records as
and undetected contingent liabilities
deemed relevant and material. Simply put, due diligence aims to take the care that a reasonable person
• Suggestions on various aspects to be taken care of before and after the proposed merger/acquisition. should take before entering into an agreement or a transaction with another party.

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Question 5 Answer 6
PB Ltd. entered into a deal with SV Ltd. for buying its business of manufacturing wooden a) The activity described in the situation is Due diligence. Due diligence is a measure of prudence
products/ goods. activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable
PB Ltd. has appointed your firm for conducting due diligence review and they want to know and prudent person under the particular circumstance, not measured by any absolute standard
the cash generating abilities of SV Ltd. What points will you check in order to ensure that the but depending upon the relative facts of the case. It involves a careful study of financial and non-
manufacturing unit of SV Ltd. will be able to meet the cash requirements internally? financial possibilities. It implies a general duty to take care in any transaction.
Answer 5 Due diligence is a process of investigation, performed by investors, into the details of a potential
investment such as an examination of operations and management and the verification of material
In order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash requirements
facts. It entails conducting inquiries for the purpose of timely, sufficient and accurate disclosure
internally, one is required to verify:
of all material statements/information or documents, which may influence the outcome of the
a) Is the company able to honor its commitments to its trade payables, to the banks, to the government transaction. Due diligence involves a careful study of the financial as well as non-financial
and other stakeholders? possibilities for successful implementation of restructuring plans.
b) How well is the company able to convert its trade receivables and inventories? Due diligence involves an analysis carried out before acquiring a controlling interest in a company
c) How well the Company deploys its funds? to determine that the conditions of the business conform with what has been presented about the
target business. Also, due diligence can apply to recommendation for an investment or advancing
d) Are there any funds lying idle or is the company able to reap maximum benefits out of the available
a loan/credit.
funds?
b) There would be no difference in answer if above activity was to be performed by a person who
e) What is the investment pattern of the company and are they easily realizable?
is not a Chartered Accountant. The activity would remain due diligence. Due diligence can be
performed by any person. It is not necessary that due diligence can only be carried out by a
Question 6 Chartered Accountant. As due diligence involves exercise of prudence and general duty to take
care in any transaction, it can be undertaken by any person.
CA. Sanjana is acting as Credit manager in branch of DFC Bank Limited. A company has
approached the branch for a request to sanction credit facilities worth ₹10 crore for meeting c) The areas where due diligence may be undertaken are: -
usual business requirements. (i) Corporate restructuring
It is a prospective new client. She checks past history of the company, back ground of promoters (ii) Venture capital financing
& directors, shareholding pattern and nature of business. Assessment of financial results of (iii) Public offerings
past years and future projections is also undertaken. She also carries out SWOT analysis of the
company.
Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score and Question 7
position of name of promoters/directors in RBI defaulter list is also verified. A nationalized bank received an application from an export company seeking sanction of a term
She also makes discreet inquiries from few clients of the branch engaged in similar line of loan to expand the existing sea food processing plant. In this connection, the General Manager,
activity regarding credit worthiness of company, its promoters and directors. who is in charge of Advances, approaches you to conduct a thorough investigation of this limited
company and submit a confidential report based on which he will decide whether to sanction
Based on above
this loan or not.
a) Identify activity being performed by CA Sanjana and discuss its nature.
List out the points you will cover in your investigation before submitting your report to the
b) Would your answer be different if this activity was to be performed by a person not qualified as a General Manager.
Chartered Accountant? Can a non-CA perform such activity? State reason.
c) Name any three other areas where identified activity can be undertaken.

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Answer 7 d) Examination of the asset and liability position to determine the tangible asset backing for the
The investigating accountant, in the course of his enquiry, should attempt to collect information on the partner’s investment, appraisal of the value of intangibles like goodwill, know how, patents, etc.
undermentioned points (Make into points) impending liabilities including contingent liabilities and those pending for tax assessment. In case
of firms rendering services, the question of tangible asset backing usually is not important, provided
(i) The purpose for which the loan is required and the manner in which the borrower proposes to
the firm’s profit record, business coverage and standing of the partners are of the acceptable order.
invest the amount of the loan.
e) Position of orders at hand and the range and quality of clientele should be thoroughly examined,
(ii) The schedule of repayment of loan submitted by the borrower, particularly the assumptions
which the firm is presently operating.
made therein as regards amounts of profits that will be earned in cash and the amount of cash
that would be available for the repayment of loan to confirm that they are reasonable and valid f) Position and terms of loan finance would call for careful scrutiny to assess its usefulness and
in the circumstances of the case. implication for the overall financial position; reason for its absence or negative impact should be
studied.
Institutional lenders now-a- days rely more, for repayment of loans, on the annual profits and
loss, and on the values of assets mortgaged to them. g) It would be interesting to study the composition and quality of key personnel employed by the
firm and any likelihood of their leaving the organisation in the near future.
(iii) The financial standing and reputation for business integrity enjoyed by directors and officers of
the company. h) Various important contractual and legal obligations should be ascertained and their nature studied.
It may be the case that the firm has standing agreement with the employees as regards salary and
(iv) Whether the company is authorized by the Memorandum or the Articles of Association to borrow
wages, bonus, gratuity and other incidental benefits. Full impact of such standing agreements
money for the purpose for which the loan will be used.
would be gauged before a final decision is reached.
(v) The history of growth and development of the company and its performance during the past 5 years.
i) Reasons for the offer of admission to a new partner should be ascertained and it should be determined
(vi) How the economic position of the company would be affected by economic, political and social whether the same synchronises with the retirement of any senior partner whose association may
changes that are likely to take place during the period of loan. have had considerable bearing on the firm’s success.
(vii) Whether any loan application to any other Bank or Financial Institution was made, and if so, the j) Appraisal of the record of capital employed and the rate of return. It is necessary to have a
reasons for rejection thereof. comparison with alternative business avenues for investments and evaluation of possible results
on a changed capital and organisation structure, if any, envisaged along with the admission of the
partner.
Question 8
k) It would be useful to have a firsthand knowledge about the specialisation, if any, attained by the
What are the important steps involved while conducting Investigation on behalf of an Incoming firm in any of its activities.
Partner?
l) Manner of computation of goodwill on admission as also on retirement, if any, should be
Answer 8 ascertained.
Broadly, the steps involved are the following: m) Whether any special clause exists in the deed of partnership to allow admission in future of a new
a) Ascertainment of the history of the inception and growth of the firm. partner, who may be specified, on concessional terms.
b) Study of the provisions of the deed of partnership, particularly for composition of partners, their n) Whether the incomplete contracts which will be transferred to the reconstituted firm will be a
capital contribution, drawing rights, retirement benefits, job allocation, financial management, liability or a loss.
goodwill, etc.
c) Scrutiny of the record of profitability of the firm’s business over a suitable number of years, with
Question 9
usual adjustments that are necessary in ascertaining the true record of business profits. Particular
attention should, however, be paid to the nature of partners’ remuneration, which may be excessive Mr. Clean who proposes to buy the proprietary business of Mr. Perfect, engages you as
or inadequate in relation to the nature and profitability of the business, qualification and expertise investigating accountant. Specify the areas which you will cover in your investigation.
of the partners and such other factors as may be relevant.

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Answer 9 (ii) The length of lease under which the premises are held, the prospects of its renewal or extension.
We discuss below the factors to be considered by a professional accountant while carrying out the (iii) The unexpired period of any patents owned by the vendors.
investigation for attaining satisfactory results: (iv) The age of the present managerial staff and the prospects of continuing in service under the new
(a) Studying the overall picture proprietorship and the possible liability, not already provided for that would arise as regards
(b) Statement of Profit and Loss payment of pensions or gratuities in case of old and aged employees/ retrenched employees.
(c) Turnover (v) If the bulk of sales are made to customers whose number is small, the profitability of the business
would be greatly shaken on withdrawing their support. This would be an element of weakness
(d) Wage structure
which should be investigated as it might affect future profitability.
(e) Depreciation and Maintenance
(vi) The valuation that could be placed on goodwill to determine whether that appearing in the book
(f) Managerial Remuneration
is less or more; if none is included to determine the amount that should be included, if at all.
(g) Exceptional and non-recurring items
(h) Repairs and maintenance
Question 10
(i) Unusual year
In a Company, it is suspected that there has been embezzlement in cash receipts. As an
(j) Balance Sheet - Fixed Assets
investigator, what are the areas that you would verify?
(k) Investments
Answer 10
(l) Inventories
(a) Cash receipts - In cases like holding back cash sales, collections by travelling salesmen, V.P.P
(m) Trade Receivables receipts, or casual receipts, e.g., sales of scrap, recoveries out of debts written off earlier, etc., the
(n) Other liquid assets amount or amounts of receipts embezzled may be subsequently covered up by the perpetrator adopting
(o) Idle assets one or other of the under-mentioned devices:
(p) Liabilities (i) Issuing a receipt to the payee for the full amount collected and entering only a part of the amount
on the counterfoil.
(q) Taxation
(ii) Showing a larger cash discount than actually allowed.
(r) Capital
(s) Interpretation of figures - Fixed Assets (iii) Adjusting a fictitious credit in the account of a customer for the value of goods returned by him.
(t) Turnover (iv) Adjusting a cash sale as a credit sale, and raising a debit in the account of the customer.
(u) Working Capital (v) Writing off a good debt as bad and irrecoverable to cover up the amount collected which has
been misappropriated.
(v) Estimating Future Maintainable Profits
(vi) Short-debiting the customer’s account in the ledger with an intention to withdraw the difference
Scope of investigation - The objective of such an investigation is to collect such information as would
when the full amount payable by him is collected.
enable the purchaser to decide whether it is worthwhile to buy the business and if so, for what amount.
The investigation should proceed broadly on the same lines as for valuation of shares. (vii) Under-casting the receipts side of the Cash Book or over-casting the payment side.
Additional matters which must receive the attention of the investigating accountant on which, if (viii) Carrying over a shorter total of the receipts from one page of the Cash Book to the next or
appropriate, information to the client should be given. overcarrying the total of the payment from one page of the Cash Book to the next with a view to
covering up misappropriation; either short banking of cash collection or a part of the amount of
In case of proprietary concerns or partnerships -
withdrawal from the bank.
(i) Reasons for the sale of the business and the effect on turnover and profits that there would be on
Verification of Cash Receipts: On the assumption that some of these may have been diverted before
retirement of the present proprietor (or partners).
being entered in the books, evidence as regards income received from different sources should be

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scrutinised, e.g., inventory, sales summaries, rental registers, correspondence with customers, advices to be taken. As an investigating accountant what will be your areas of verification and the
of travelling salesmen and counterfoils or receipts. Carbon copies of receipts marked ‘duplicate’, procedure to be followed for verification of defalcation of inventory?
should be scrutinised to confirm that they are in fact copies of receipts issued earlier. In addition, by Answer 12
recalling paying-in-slips from the bank the details of cash deposited on each day should be compared
(a) Inventory Frauds-Inventory frauds are many and varied but here we are concerned with
with those shown in the Cash Book. The record of sales of scrap of waste paper, that of collection of
misappropriation of goods and their concealment.
rents from labourers temporarily accommodated in the company’s quarters, that of refunds of amounts
deposited with the electric supply co., or any other Government authorities should be examined for (i) Employees may simply remove goods from the premises.
finding out if any of these amounts have been misappropriated. Cash sales should be vouched in (ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
detail. Recoveries from customers and sundry parties should be checked with the copies of receipts
(iii) Inventory records may be manipulated by employees who have committed theft so that book
issued to them; deductions made on account of cash discounts should be reviewed. All withdrawals
quantities tally with the actual quantities of inventories in hand.
from the bank should be checked by reference to corresponding entries in the bank pass book.
(iv) Inflating the quantities issued for production is another way of defalcating raw materials and
store items.
Question 11
(v) Stocks actually dispatched but not entered in sales/ debtor’s account.
J Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future maintainable
Verification Procedure for Defalcation of inventory - It may be of trading stock, raw materials,
sales. As the person entrusted to value S Ltd., what factors would you consider in assessing the
manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The
future maintainable turnover?
loss may be the result of a theft by an employee once or repeatedly over a long period, when the
Answer 11 same have not been detected. Such thefts usually are possible through collusion among a number of
In assessing the turnover which the business would be able to maintain in the future, the following persons. Therefore, for their detection, the entire system of receipts, storage and dispatch of all goods,
factors should be taken into account: etc. should be reviewed to localise the weakness in the system.
(i) Trend: Whether in the past, sales have been increasing consistently or they have been fluctuating. The determination of factors which have been responsible for the theft and the establishment of guilt
A proper study of this phenomenon should be made. would be difficult in the absence of: (a) a system of inventory control, and existence of detailed record
of the movement of inventory, or (b) availability of sufficient data from which such a record can be
(ii) Marketability: Is it possible to extend the sales into new markets or that these have been fully
constructed. The first step in such an investigation is to establish the different items of inventory
exploited?
defalcated and their quantities by checking physically the quantities in inventory held and those shown
Product wise estimation should be made. by the Inventory Book. Investigating accountant should ascertain the exact duties of persons handling
(iii) Political and economic considerations: Are the policies pursued by the Government likely to the stocks received in and issued from store for production/ sale or any other purpose. Identify the
promote the extension of the market for goods to other countries? Whether the sales in the home excessive control in the hands of a single person, without any supervision as it will widen the scope
market are likely to increase or decrease as a result of various emerging economic trends? of investigation.
(iv) Competition: What is the likely effect on the business if other manufacturers enter the same field Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be verified
or if products which would sell in competition are placed on the market at cheaper price? Is the by reference to entries in the Goods Inward and Outward Registers and the documentary evidence
demand for competing products increasing? Is the company’s share in the total trade constant or as regards purchases and sales. This would reveal the particulars of inventory not received but paid
has it been fluctuating? for as well as that issued but not charged to customers. Further, entries in respect of returns, both
inward and outward, recorded in the financial books should be checked with corresponding entries in
the Inventory Book. Also, the totals of the Inventory Book should be checked. Finally, the shortages
Question 12 observed on physical verification of inventory should be reconciled with the discrepancies observed
MF. Ltd., engaged in the manufacturing of various products in its factory, is concerned with on checking the books in the manner mentioned above.
shortage in production and there arose suspicion of inventory fraud. You are appointed by MF In the case of an industrial concern, issue of raw materials, stores and tools to the factory and receipts
Ltd. To evaluate the options for verifying the process to reveal fraud and the corrective action of manufactured goods in the godown also should be verified with relative source documents.

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Defalcations of inventory, sometimes, also are committed by the management, by diverting a part Question 14
of production and the consequent shortages in production being adjusted by inflating the wastage in General objective of an audit is to find out whether the financial statements show true and fair
production; similar defalcations of inventories and stores are covered up by inflating quantities issued view. On the other hand, investigation implies systematic, critical and special examination of the
for production. For detecting such shortages, the investigating accountant should take assistance of records of a business for a specific purpose.
an engineer. For that he will be more conversant with factors which are responsible for shortage in
In view of the above, you are required to brief out the difference between Audit and Investigation.
production and thus will be able to correctly determine the extent to which the shortage in production
has been inflated. In this regard, guidance can also be taken from past records showing the extent of Answer 14
wastage in production in the past. Similarly, he would be able to better judge whether the material
issued for production was excessive and, if so to what extent. The per hour capacity of the machine Basis of Difference Investigation Audit
and the time that it took to complete one cycle of production, also would show whether the issues have (i) Objective An investigation aims at establishing The main objective of an audit
been larger than those required. a fact or a happening or at assessing a is to verify whether the financial
particular situation. statements display a true and fair
view of the state of affairs and the
Question 13 working results of an entity.
In a Public Limited Company, it is suspected by the Management that there has been embezzlement (ii) Scope The scope of investigation may be The scope of audit is wide and in case
in supplier’s ledger. As an auditor of the Company, you have been asked to investigate the governed by statute or it may be non- of statutory audit the scope of work
matter. What are the major areas that you would verify in this regard? statutory. is determined by the provisions of
relevant law.
Answer 13 (iii) Periodicity The work is not limited by rigid time The audit is carried on either quarterly,
(a) Frauds through suppliers’ ledger - frame. It may cover several years, as half-yearly or yearly.
(i) Adjusting fictitious or duplicate invoices as purchases in the accounts of suppliers and the outcome of the same is not certain.
subsequently misappropriating the amounts when payments are made to the suppliers in respect (iv) Nature Requires a detailed study and Involves tests checking or sample
of these invoices. examination of facts and figures. technique to draw evidences for
Investigation is voluntary in nature. forming a judgement and expression
(ii) Suppressing the Credit Notes issued by suppliers and withdrawing the corresponding amounts of opinion. It is mandatory for
not claimed by them. companies.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that the (v) Inherent No inherent limitation owing to its Audit suffers from inherent limitation.
same have been paid to them. Limitations nature of engagement.
(iv) Accepting purchase invoices at prices considerably higher than their market prices and collecting (vi) Evidence It seeks conclusive evidence. Audit is mainly concerned with
the excess amount, paid in cash, from the suppliers. primafacie evidence.
(vii) Observance It is analytical in nature and requires a Is governed by compliance with
Verification of balances in suppliers’ ledger - The Purchase Journal should be vouched by reference
of Accounting thorough mind, capable of observing, generally accepted accounting
to entries in the Goods Inward Book and the suppliers’ invoices to confirm that amounts credited
collecting and evaluating facts. principles, audit procedures and
to the accounts of suppliers were in respect of goods, which were duly received and the suppliers’ Principles
disclosure requirements.
accounts had been credited correctly. All the suppliers should be requested to furnish statements of
(viii) Appointing Even third party can appoint Auditor is appointed by owner/
their accounts to see whether or not any balance is outstanding or due so as to confirm that allowances
Agency Investigator shareholders of company/ enterprise
and rebates given by them have been correctly adjusted and were duly authorized by the authorized
person/ officer. Examine the system of internal control in relation to purchase orders issued and (ix) Reporting The outcome is reported to The outcome is reported to the owners
identify possibilities of collusion with suppliers. the person(s) on whose behalf of the business entity.
investigation is carried out.

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Question 15 Step 5. Reporting

Enumerate the steps to be undertaken in case of forensic accounting process. Issuing an report is the final step of a forensic accounting. Accountant / Investigators will include
Answer 15 information detailing the fraudulent activity, if any has been found. The client will expect a report
containing the findings of the investigation, including a summary of evidence, a conclusion as to the
Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and
amount of loss suffered as a result of the fraud and to identify those involved in fraud. The report
the procedures performed will be specific to it. However, in general, many Forensic Accounting
may include sections on the nature of the assignment, scope of the investigation, approach utilized,
assignments will include the steps detailed below.
limitations of scope and findings and/or opinions.
Step 1. Initialization
The report will include schedules and graphics necessary to properly support and explain the findings.
It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the assignment. The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
It is helpful to meet the client to obtain an understanding of the important facts, players and issues at were circumvented. It is also likely that the investigative team will recommend improvements to
hand. A conflict check should be carried out as soon as the relevant parties are established. It is often controls within the organization to prevent any similar frauds occurring in the future.
useful to carry out a preliminary investigation prior to the development of a detailed plan of action.
Step 6. Court proceedings
This will allow subsequent planning to be based upon a more complete understanding of the issues.
The investigation is likely to lead to legal proceedings against the suspect, and members of the
Step 2. Develop Plan
investigative team will probably be involved in any resultant court case. The evidence gathered during
This plan will take into account the knowledge gained by meeting with the client and carrying out the the investigation will need to be presented at court, and team members may be called to court to
initial investigation and will set out the objectives to be achieved and the methodology to be utilized describe the evidence they have gathered and to explain how the suspect was identified.
to accomplish them.
Step 3. Obtain Relevant Evidence
Question 16
Depending on the nature of the case, this may involve locating documents, economic information,
Briefly discuss the key content of Forensic Accounting and Investigation Report.
assets, a person or company, another expert or proof of the occurrence of an event. In order to gather
detailed evidence, the investigator must understand the specific type of fraud that has been carried Answer 16
out, and how the fraud has been committed. The evidence should be sufficient to ultimately prove Key Elements of the Report: The Professional shall consider the inclusion of the following key
the identity of the fraudster(s), the mechanics of the fraud scheme, and the amount of financial loss elements in the report (indicative list):
suffered. It is important that the investigating team is skilled in collecting evidence that can be used in
• Title, addressee and distribution list (if any)
a court case within the stipulated time period, and in keeping a clear chain of custody until the evidence
is presented in court. If any evidence is inconclusive or there are gaps in the chain of custody, then • Scope and objectives of the assignment
the evidence may be challenged in court, or even become inadmissible. Investigators must be alert to • Approach and broad work procedures undertaken
documents being falsified, damaged or destroyed by the suspect(s).
• An Executive Summary of the results, covering all important aspects and the essence of the findings
Step 4. Perform the analysis
• Reference to use of an expert, where applicable
The actual analysis performed will be dependent upon the nature of the assignment and may involve:
• The fact that the assignment has been conducted in accordance with FAIS, or any material departures
• calculating economic damages; therefrom
• summarizing a large number of transactions; • List of findings supported by key evidences, sources of evidences, and other relevant matter;
• performing a tracing of assets; • Assumptions, limitations and disclaimers of the assignment
• performing present value calculations utilizing appropriate discount rates; • Conclusions (if any) drawn from the assessment undertaken.
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model; and
• utilizing charts and graphics to explain the analysis.
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Question 17 ₹5 crore respectively. Its sales have increased from ₹ 25 crores in first year to ₹45 crores in year
ABC Ltd. is a listed company having turnover of 50 crores & plans expansion by installation of just ended. It is generating cash profits and is timely servicing its debts.
new machines at new building-having total additional project cost of ₹ 20 crore The borrower was earlier catering to domestic market. However, now it is in process of procuring
export orders and working assiduously in this regard. The expansion plans are in line with
Rupees (In crore) Purpose
development in area of marketing relating to exports.
10.0 - for Building
8.5 - for Machinery However, there are a large number of units catering to domestic and export market of garments
1.5 - for Working Capital in NOIDA, Delhi and surrounding areas. There is also demand slump in biggest US market.
20 Crore Total
Besides, the unit is family-based and relies upon marketing skills of its main promoter. There
Project gets implemented in 2022-23 and one of the accountants report to the Managing Director is lack of wellpaid qualified staff with the borrower to deal effectively with its customers both
that some suspicious transactions are noticed in the purchase of building material. But the domestic as well as foreign.
Management is confused as to whether they should get an audit or Forensic Accounting done for
He starts jotting down and elaborating above points. Identify what he is trying to do as part of
the same. Advise Management about the difference in forensic accounting and audit.
due diligence
Answer 17
Answer 18
Sr. No. Particulars Other Audits Forensic Accounting
As part of due diligence exercise, he is performing SWOT analysis of borrower. He is making analysis
1. Objectives Express an opinion as to Whether fraud has actually
of strengths, weaknesses, opportunities and threats (SWOT) pertaining to borrower. Features such
‘True & Fair’ presentation taken place in books
2. Techniques Substantive & Compliance. Investigative, substantive or as rise in sales, generation of cash profits and timely service of debts represent borrower strengths.
Sample based indepth checking Lack of well-paid qualified staff to deal effectively with its domestic and foreign customers is an area
3. Period Normally for a particulars No such limitations of weakness. Entering into export market presents opportunity for borrower and presence of large
accounting period. number of competitors and demand slump in US market reflect threats.
4. Verification of stock, Relies on the management Independent/verification of
Estimation realisable value certificate/Management suspected/selected items
Question 19
Representation where misappropriation in
of assets, provisions, A company has installed an Effluent treatment plant (ETP) in compliance with pollution control
suspected
liability etc. regulations of the state government. The authority structure in the company is fairly decentralized
5. Off balance sheet items Used to vouch the arithmetic Regulatory & propriety of and top management of the company has given considerable leeway to different departments for
accuracy & compliance with these transactions/contracts meeting their manpower requirements in accordance with emerging and changing needs from
(like contracts etc.)
procedures. are examined. time to time. Of late, the top management has grown suspicious over manpower expenditure in
6. Adverse findings if any Negative opinion or qualified Legal determination of fraud section maintaining and beautifying area around ETP. There is a system in the company where
opinion expressed with/ impact and identification of time cards are punched by all employees to mark attendance.
without quantification perpetrators depending on Suggest any one procedure you would perform as an investigator to bring out the facts.
scope.
Answer 19
The attendance record of employees pertaining to that section can be analyzed with regards to in
Question 18
and out time. Further, surprise visit to the site can be conducted to see the actual number of workers
CA. Y is employed with a leading private sector BDFP Bank posted in NOIDA branch. One of at a point of time. It may reveal ghost workers. Discrepancies in attendance records vis-à-vis actual
the existing borrowers has approached branch with a proposal to sanction fresh term loan of ₹5 number of workers present could reveal dummy workers. Such a visit would also give indication of
crore with commensurate increase in working capital credit facilities relating to expansion of actual work done in the area and give an inkling of productivity of employees.
its garment manufacturing unit. While performing due diligence, he notices that company was
formed just two years ago and had availed term loan of ₹ 10 crore and cash credit facilities of
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Question 20
X Limited engaged in manufacturing of floor coverings has taken a Product Liability Insurance
policy (PLI). Such a policy covers risk of liabilities for damages for bodily injury resulting
from sale and distribution of floor coverings by vendors of X Limited’s products. The policy
is also subject to “claim series” clause. A Claims Series event is a series of two or more claims
arising from one specific common cause which are attributable to the same fault in design or
manufacture of products or to the supply of the same products showing the same defect. A claim
series event is deemed to be one claim under the terms & conditions of PLI policy.
The company has been asked to shell out damages of `5 crore due to supply of faulty products
to one of its vendors. The vendor had sold floor coverings to a 5 -star hotel which has alleged
that harmful chemicals used in dyeing of floor coverings have resulted in skin ailments to some
of its guests.
Being in capacity of forensic accountant Professional appointed by insurance company, what
special issues you would keep in mind while dealing with claims involving PLI policy covering
such matters?
Answer 20
(i) In claims involving product liability insurance policies, many documents are required from third
parties. The third party may be unwilling to provide relevant documents to forensic accountant
concerning the very organization responsible for causing damages.
(ii) Independence of forensic accountant become paramount in such types of assignments because
it involves engagement with parties who are not directly claiming from insurance company.
Forensic accountant needs to resist any pressure or interference in establishing the scope of the
assignments or the manner in which the work is conducted and reported.
(iii) The company might be willing to negotiate it to salvage its reputation. It can lead to additional
complexities.
(iv) Quantification of legal liability under the policy can prove to be a challenging task and it has to
be determined in accordance with policy terms & conditions.
(v) Careful analysis of date of loss when first claim occurred in accordance with “claim series”
clause and whether the same falls under the policy.

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DUE DILIGENCE, INVESTIGATION AND FORENSIC AUDIT
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18
CHAPTER
SUSTAINABLE
DEVELOPMENT
Question 1
What type of companies are required to mandatorily furnish the Business Responsibility and
Sustainability Report (BRSR) as per the SEBI circular with effect from FY 2022-23 ?
Answer 1
The BRSR seeks disclosures from listed entities on their performance against the nine principles of
the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each
principle is divided into essential and leadership indicators.
The essential indicators are required to be reported on a mandatory basis while the reporting of
leadership indicators is on a voluntary basis. Listed entities should endeavour to report the leadership
indictors also.
Reporting under BRSR is mandatory from financial year 2022-23. However, disclosure was voluntary
in financial year 2021-22.
Question 2
What are the nine principles of BRSR? How are the nine principles of BRSR linked with the 17
UN Sustainable Development Goals?
Answer 2
The nine principles in BRSR are categorized into the ESG components of Environment, Social and
Governance with two of the nine in Environment, three in social and four in Governance. Even though
they are separate, they are interlinked to each other in some way. For example, the environmental
protection is closely linked to the stakeholder engagement and inclusive growth.
Principle 1 –Ethics, Transparency and Accountability:
The first principle emphasizes that the business decisions in an organisation should be open to
disclosure and accessible to the relevant interested parties.
The essence of the core elements associated with the first principle are:
a) The entities’ governing structure should develop policies, procedures, and practices for their
offices, factories, and work areas, ensuring that ethics is not compromised.
b) The information relating to the policies, procedures, and practices along with the performance
should be made available to the stakeholders.
CA Harshad Jaju
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SUSTAINABLE DEVELOPMENT SUSTAINABLE DEVELOPMENT
c) In case of adverse effects, more care has to be taken for transparent disclosures. h) The skill development, career development and training of the workforce is another responsibility
d) The entities in the value chain should be encouraged to adopt these principles by the governance of the entities employing them.
structure. i) The creation of a workplace which is free of harassment and violence is also a responsibility of the
e) The entities should proactively respond to the outside entities that violate the nine principles of the entity.
BRSRs. Principle 4 -Respect for stakeholders’ interests and responsiveness:
This includes their suppliers, distributors, sub-contractors, or regulatory officers that may engage with The concept of interested party or stakeholders to a business has been a point of discussion in all
the business concern. the regulatory and voluntary systems that relate to the management system of any organisation, be it
Principle 2 –Safe and Sustainable Goals and Service: related to the quality, environment or the occupational health and safety of the workers.
The entities should make sure that their goods, services, and the operations result in better life for the The essence of the core elements associated with the principle is:
consumers and end-users. a) The entities have to be transparent and communicate with the stakeholders about the impacts
The essence of the core elements associated with the second principle is: of their operations and business decisions on the people and the nature. The policies, decisions,
and the impact of the operations of the organisation to the stakeholders have to be disclosed
a) When a product is designed by the entity, the production methods and technologies have to be
transparently with no ambiguity on the extent of the issues.
devised in such a way so as to minimize the resource usage to make it sustainable.
b) The entities have to systematically determine the context of their operation and identify their
b) The entities are also responsible to educate and make aware their consumers and clients about their
interested parties.
rights.
c) The entities should fairly share the benefits to the stakeholders or give an opportunity to them to
c) The entities should take measures that reduce the over exploitation of the nature’s resources by
benefit from the operations in an equitable manner.
consuming sustainably and encourage methods for reduce, reuse and recycling of the resources.
Principle 5 -Respect and promote human rights:
Principle 3 –Promote wel-lbeing of all employees including those in the value chain:
The concept of human rights is a vast topic that covers a wide variety of violence and belligerent
The third principle relates to all the initiatives an entity has to take for the benefit of its employees
abusive issues faced by people. It refers to the human rights issues that happen directly or indirectly
from the point of view of their dignity, health, well-being.
due to the operation of the business.
The essence of the core elements associated with the principle is:
The essence of the core elements associated with the principle are:
a) The entity should ensure compliance with all regulatory requirements as far as employees are
a) The entities should have a clear understanding of the human rights and various ways by which
concerned.
human rights can be violated from the perspective of the Constitution of India, national laws and
b) The entities are to respect the dignity of employee as a human being and should not restrict their policies and the content of International Bill of Human Rights.
freedom of associations, unions, and other participatory mechanism for collective bargaining of
b) The entities when developing their management systems, should integrate the human rights element
their rights and redressal of issues they face at the workplace.
into their policies, procedures, and practices.
c) The entities should prevent all kinds of child labour, bonded labour, and any other forms of
c) Businesses should recognize and respect the human rights of all relevant stakeholders and groups
involuntary labour.
within and beyond the workplace, including that of communities, consumers, and vulnerable and
d) The entities should have a system in which the work-life balance of the employees is not marginalized groups.
compromised.
Principle 6 –Protection and restoratioonf Environment:
e) The businesses have to ensure timely payment of the worker’s wages and compensation.
The sixth principle looks at the environmental responsibility as a basic requirement for the economic
f) The payment of the wages has to be as per the living wages, that can take care of the basic needs prosperity and sustainability.
and provide economic security to the employees.
The core elements associated with the principle are:
g) The entities are responsible to create a workplace and work environment that is safe, hygienic, and
a) The entities should have policies, procedures, and practices in place to assess and rectify impacts
comfortable for people to work for long durations.
to the environment. This should cover the whole life cycle of the product.
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b) The entities have to make use of natural and manmade resources in an optimum manner to ensure e) The entities should take care to ensure that business induced displacement or relocation of
their sustainability by taking feedback from the stakeholders. communities does not happen, and in unavoidable cases, should make sure to have mutually agreed,
c) The entities have to measure their performance relating to the prevention of pollution, destruction participative, and informed negotiations to provide fair compensation to the affected people.
of forests, waste generation, energy use, land use, etc. f) All forms of intellectual property and traditional knowledge should get the deserved respect from
d) The entities have to contribute towards climate change resilience in line with India’s commitment the organisation, and efforts should be made to ensure that benefits derived from their knowledge
to various international mechanisms such as, Paris Agreement and National Action Plans for are shared equitably.
Climate Change. Principle 9 –Provide value to the consumers in a responsible manner:
e) The entities should explore the comparison of its activities with industry best practices to reduce, The primary purpose of any business is to create or provide useful products and services to the
reuse and recycle/ recover materials, resources. customer in exchange of reasonable profits.
f) The companies have to look out for avenues by which they can improve their performance towards The core elements associated with the principle are:
various environmental responsibilities. a) Entities should put in their efforts to reduce the negative impacts of their products and services on
Principle 7 –Influence on Public and Regulatory Policy: consumers, natural environment, and society at large.
The seventh principle of influencing the policy formulation positively recognizes that the businesses b) When conceptualizing, designing, and marketing their products, the organisation should not in any
operate within the framework of statutory and legislative policies of the governing authority. manner prevent the freedom of choice and fair competition.
The principle further highlights that - c) The entities should transparently and accurately disclose all kinds of adverse impacts to the user,
a) The core elements of BRSR are to have met holistically when the organisation go ahead with their planet, society, on the biodiversity from their products.
contributions to policy formulation and policy advocacy. d) When handling customer data, the right to privacy of the customer needs to be maintained.
b) The collective associations such as, the trade groups and industry chambers have to be utilized e) Entities should inform the customers on the safe and responsible ways of usage, reuse, recycling,
when moving ahead with the policy advocacy and formulation. and disposal of their products, and ways to eliminate over-consumption.
c) The role in policy advocacy by the organisation should be in such a way that it encourages fair f) When advertising about their products, the organisations should ensure that misleading and
competition and prevents human rights abuses. confusing information is not exposed to the customers about their products or its usage.
Principle 8 –Promote Inclusive Growth and equitable development: g) Business enterprises should make available transparent and accessible grievance redressal and
This can work only with close participation and collaboration amongst the entities, authorities, the feedback management system for their customers to raise their voices or to seek clarifications.
civil associations contributing to one another for a better livelihood, and assistance to the marginalized h) Entities, when in the business of providing essential goods and services (e.g., Utilities), should
communities. enable universal access, including to those whose services have been discontinued for any reason,
The core elements of the eighth principle are: in a nondiscriminatory and responsible manner.
a) The entities should have systems in place to identify and address impacts of their activities on the
social, cultural, and economic aspects of the people. This includes business created issues like, Question 3
land acquisition and use and construction activities for new facilities.
What are the global trends in sustainable reporting?
b) The entities should review, measure, and track the adverse impacts of their activities on the society
Answer 3
and environment and make action plans to mitigate them adequately.
In March 2022, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure
c) The entities should make efforts to bring up creative products, technologies, and business concerns
requirements, which would expand the annual reporting requirements of publicly traded companies.
that help the marginalized communities to have well-being and a better quality of life.
In their SEC filings, companies would be required to discuss financially material, climate-related risks
d) Entities when designing their CSR activities should review the local and regional development guided by the TCFD recommendations. Reporting would include:
priorities to help the marginalized groups and communities.
• The company’s climate risk management processes

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• How the risks identified would impact financial performance

• How these risks are managed and mitigated
June 2022 China’s March 2021 Sustainable
• Any scenario analysis, transition plans, and publicly announced climate goals Voluntary guidance Finance Disclosures
for Enterprise ESG Regulation (SFDR)
In 2019, the UK passed a law targeting net zero greenhouse gas (GHG) emissions by 2050. disclosure takes effect go into effect for asset
managers and financial
A key regulation for UK ESG disclosures is the Companies Act of 2006, which includes requirements advisors operating in EU
for annual reporting. These rules apply to large companies that are either listed, exceed £500 million
in annual turnover, or have more than 500 employees. Non-financial information has always been April 2021 European comission
April 2022 European adopts the CSRD proposal,
required in annual reports, but in 2022, the Act was expanded to include sustainability matters. The Finacial Reporting which will require large
new requirements align with the recommendations from the Task Force on Climate-Related Financial Advisory Board Issues companies to report on social and
exposure draft of the environmental impacts starting
Disclosure (TCFD). As such, companies are required to discuss the strategy, processes, and due European Sustainbility in 2024
diligence regarding matters of: Reporting Standard
(ESRS) for public
- The environment (including the company’s impact on the environment) commentary
- The company’s employees

- Social matters October 2021 GRI
March 2022 US SEC Standards Updated
- Respect for human rights
announces climate
change disclosure
- Anti-corruption and anti-bribery
proposal ISSB exposure
draft for public
Specifically for the environment, climartel-ated disclosures must include:
commentary
- Climate change-related risks and opportunities
- How these risks and opportunities are managed through targets and KPIs
November 2021 IFRS Foundation
- How climate change is addressed in corporate governance announces the formation of its
February 2022 THe EU
global reporting standarization
- How climate risk impacts strategy adopts a proposal for a
intiative through the ISSB UK
directive on corporate December 2021 The
European Commission Financial conduct authority
Additionally, large UK companies are required to report on their UK energy use and carbon emissions sustainablity Due
releases sustainablity requirements
Diligence with Rules published the first
within their annual reports through the Streamlined Energy and Carbon Reporting. for companies to respect delegated act on disclosure paper
human rights and the sustainablity activities
Further, in 2023 ESG reporting in the UK will be further formalized through the Sustainability environment in their for the first two
evironmental objectives
Disclosure Requirements (SDRs). The SDRs will provide a framework for corporates to manage global value chains
of the EU territory
sustainability-related risks, opportunities, and impacts, as well as set relevant metrics and targets.
Following table showcases the evolution of sustainable development reporting in the recent past:
Question 4
What are the 6 C’s of Integrated reporting?
Answer 4
There are 6 Cs of Integrated Reporting – also known as 6 capitals:
(i) Financial Capital:
- Pool of funds that is available to the organization for use in the production of goods or provision
of services.

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- Obtained through financing, such as debt, equity, or grants, or generated through operations or Question 5
investments. What is the methodology of providing assurance in BRSR?
(ii) Manufactured Capital: Answer 5
Prepration of
- Seen as human-created, production-oriented equipment and tools. Assessment /
Verification report
- Available to the organization for use in the production of goods or the provision of services, including final results
including buildings, equipment, infrastructure (such as roads, ports, bridges & waste, and water of Assessment /
Submission of
Recommendation
treatment plants). findings of the on-
Review of the
site assessment and
(iii) Natural Capital: responses and
document review
Issuance of clarifications on the
- Is an input to the production of goods or the provision of services. O n - s i t e Assessment Report findings
Assessment/ and Assessment
- An organization’s activities also impact, positively or negatively, on natural capital. Preliminary
Verification of Statement
Review of
ESG Report
- Includes water, land, minerals and forests, biodiversity, and ecosystem health. ESG report,
parameters
(iv) Human Capital:
- People’s skills and experience, their capacity, and motivations to innovate, including their: Question 6
- Alignment with and support of the organization’s governance framework & ethical values such What is the auditor’s role on ESG aspects in an audit of financial statements of the Company?
as its recognition of human rights. Answer 6
- Ability to understand and implement an organization’s strategy. The role of the auditor is to obtain reasonable assurance about whether the financial statements as
- Loyalties and motivations for improving processes, goods, and services, including their ability a whole are free from material misstatement, whether due to fraud or error, to enable auditor to
to lead and to collaborate. report whether the financial statements are prepared and presented fairly, in all material respects, in
(v) Social Capital: accordance with the applicable financial reporting framework.
- Institutions and relationships established within and between each community, group of In developing the understanding of an entity, the auditor should include the consideration of climate-
stakeholders and other networks to enhance individual and collective well-being. related risks and how these risks may be relevant to the audits. The climate-related risks could be more
relevant in certain sectors or industries, e.g., banks and insurance, energy, transportation, materials
Includes: and buildings, agriculture, food, and forestry products.
o Common values and behaviour. Many investors and stakeholders are seeking information from auditor’s reports about how climate-
o key relationships, the trust and loyalty that an organization has developed and strives to build related risks were addressed in the audit. With this increased user focus on climate change, auditor
and protect with customers, suppliers, and business partners. need to be aware of, and may face, increasing pressure for transparency about climate matters in our
o an organization’s social license to operate. auditor’s reports.
(vi) Intellectual Capital: However, the auditor’s reports must follow the requirements of applicable auditing standards.
Key element in an organization’s future earning potential, with a tight link and contingency between The auditor’s report is a key mechanism of communication to users about the audit that was
investment in R&D, innovation, human resources, and external relationships, which can determine performed. In addition to the audit opinion, it provides information about auditor’s responsibilities
the organization’s competitive advantage. and, when required, an understanding of the matters of most significance in our audit and how they
were addressed.
Asia Pacific region continues to dominate in presenting sustainability data in annual reports.
In some circumstances, it may warrant inclusion of an Emphasis of matter paragraph to draw attention
Approximately with 60% of Companies reporting in 2022. Integrated reporting is strong in the Middle
to disclosures that are of fundamental importance to users’ understanding of the financial statements.
East.
The auditor should also determine whether the entity has appropriately disclosed relevant climate-

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related information in the financial statements in accordance with the applicable financial reporting Question 8
framework e.g., Indian Accounting Standards or Accounting Standards, when relevant before Trustworthy Industries Limited (a listed company) has already been preparing and disclosing its
considering climate-related matters in the auditor’s report. sustainability report based upon internationally accepted reporting framework of “Integrated
The auditor should also read the other information for consistency with information disclosed in the Reporting” on a voluntary basis even some years before BRSR reporting became mandatory.
financial statements and information that may be publicly communicated to stakeholders outside the Even after BRSR reporting became mandatory, it is cross-referencing disclosures made under
financial statements, such as management report narratives in the annual report, press releases, or such reporting to disclosures sought under BRSR. The key thrust of “Integrated Reporting” is
investor updates. how company creates value over short, medium and long term.
This is a requirement under ISA 720 and SA 720, The Auditor’s Responsibilities Relating to Other Following further information is provided in respect of the above company: -
Information. (i) It has increased the number of customers using digital customer mobile app of the company
from 2 lac users to 4 lac users. There is 100% increase in digital collection. It has benefitted
customers of the company and resulted in use of digital methods for business operations of
Question 7
the company.
You have recently joined a listed company after qualifying CA final exams through campus
(ii) It has increased the number of beneficiaries under its flagship CSR Programmes from
placement programmed conducted by CMI&B at ICAI. Although the company you have joined
previous 10000 to 75000. It has provided value for communities and provided sustainable
in is not amongst top 1000 listed companies in the country, it wants to include “Sustainability
livelihood to them.
reporting” in accordance with Global Reporting Initiative framework (GRI) in its annual report
on voluntary basis. “Sustainability reporting” seems to be new buzzword in corporate circles Discussing above information, identify which of the capitals of “Integrated Reporting” are being
and you are assigned responsibility for collating all the information required for such reporting. referred to at [i] and [ii] respectively?
In above context, dwell upon what is your understanding of “Sustainability reporting”? Can Answer 8
you list some of its expected benefits? The information at [i] states that company has increased the number of customers using digital mobile app.
Answer 7 Besides, it has led to 100% increase in digital collection. Therefore, it involves use of technology for
Sustainability reporting is an organization’s practice of reporting publicly on its economic, deriving business benefits. It has invested in innovation deriving business benefits from digitization.
environmental, and/or social impacts, and hence its contributions – positive or negative – towards the The capital referred to at [i] is “Intellectual Capital”.
goal of sustainable development. Increase in number of beneficiaries under flagship CSR Programmes providing value for communities
Sustainability reporting refers to the information that companies provide about their performance to the and sustainable livelihood is an example of relationships established within and between each
outside world on a regular basis in a structured way. It is the comprehensive mechanism of measuring community, group of stakeholders and other networks to enhance individual and collective well-
and disclosing sustainability data with performance indicators and management disclosures. being. The capital referred to at [ii] is “Social and Relationship Capital.”
Expected Benefits can help stakeholders to understand organizations performance vis a vis
sustainability and impacts. The reporting process emphasizes the link between financial and non- Integrated Case Scenario
financial performance.
“Quick Push Finance Limited one of the top listed 1000 companies by market capitalization.
Such reporting can help entities to focus on long-term value creation, by addressing environmental, As per a SEBI circular, Business Responsibility and Sustainability Report (BRSR) based on
social and governance (ESG) issues. Since investors are increasingly recognizing that environmental ESG parameters is mandatory from financial year 2022-23 for top listed 1000 companies. The
and social issues provide both risks and opportunities in respect of their investments and are seeking company is an NBFC and is engaged mainly in providing finance for commercial vehicles.
disclosures on environmental and social performance of businesses, they can use ESG performance
The report is to be prepared in three sections- Section A, B and C. Whereas Section A and B
of companies to make investment decisions.
relate to general disclosures and management & process disclosures respectively, Section C of
Investing in social and environmental issues will not only improve own business continuity of the report relates to principle wise performance disclosures. Under this section C, information
companies but also put them in a better position with their B2B (Business to Business) customers as is sought on each of the 9 principles of “National Guidelines on Responsible Business Conduct”
well as enable them to acquire new ones. (NGBRCs). This information is categorized on two indicators i.e., “Essential indicators” and
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“Leadership indicator. 3. Considering description of membership of various industry chambers/Trade associations and
The said company has an anti-corruption/anti-bribery policy which is available on its website. providing of inputs to government from improvement in administrative processes, which of the
Besides, the company has regularly conducted awareness Programmes for its dealers highlighting NGBRC principle is referred to?
relevant governance practices of the company. a) Principle 8
The company is sensitive to environmental concerns. It has established mechanisms to recycle b) Principle 4
hazardous e waste in accordance with applicable laws. Further, disposal of paper waste is also c) Principle 3
made responsibly. It is also a member of 5 prominent industry chambers/trade associations
d) Principle 7
including FICCI, CII and ASSOCHAM. Besides, regular inputs to government are provided by
the company through various forums for improvement in administrative processes relating to Answer 3 (d)
automobile and financial sectors.
One of the NGBRC principles states that businesses should promote inclusive growth and 4. Which of the following activities relates to the principle that businesses should pro inclusive
equitable development. The scope of this principle is wide and quite encompassing. Many growth and equitable development?
activities of company could fall under promotion of inclusive growth and equitable development.
a) CSR projects undertaken by the company in designated aspirational districts of country
The CFO of company is clueless as to preparation of BRSR. Help him out by answering the
b) Carrying out real time digital Net Promoter score (NPS) with all public customers to gauge
following questions.
customer reactions and satisfaction
Based upon above, answer the following questions:
c) Getting conducted “energy audits” in the company
1. As regards anti-corruption/anti-bribery policy and organization of awareness Programmes
d) Conducting Programmes to assist employees in finding employment after retirement.
for dealers conducted during the year, which of the following is most likely to be true?
Answer 4 (a)
a) Having an anti-corruption/anti-bribery policy and organization of awareness Programmes for
dealers are in nature of essential indicators.
b) Having an anti-corruption/anti-bribery policy and organization of awareness Programmes for 5. Which of the following statements is true in respect of essential indicators and leadership
dealers are in nature of leadership indicators. indicators as far as their reporting in BRSR is concerned?
c) Having an anti-corruption/anti-bribery policy is in nature of essential indicators. Organization of a) Both types of indicators are mandatorily required to be disclosed.
awareness Programmes for dealers is in nature of leadership indicators. b) Essential indicators require mandatory disclosure whereas leadership indicators require voluntary
d) Having an anti-corruption/anti-bribery policy is in nature of leadership indicators. Organization of disclosure.
awareness Programmes for dealers is in nature of essential indicators. c) Essential indicators require voluntary disclosure whereas leadership indicators require mandatory
Answer 1 (c) disclosure.
d) All indicators based information whether relating to essential indicators or leadership indicators
is voluntary.
2. As regards established mechanisms for recycle of hazardous e- waste and disposal of paper
waste by company, which of the NGBRC principle(s) are involved? Answer 5 (b)
a) Principle 5 only
b) Principle 9 only Case Study
c) Principles 6 and 9 The agrochemical sector is about a $35 billion industry in India. The Indian agrochemicals market
d) Principles 2 and 6 is segmented by product type (fertilizers, pesticides, adjuvants, and plant growth regulators)
and application (crop-based and non-crop-based). India is one of the most prominent exporters
Answer 2 (d)
of agrochemicals in the world and is being keenly looked at as an ideal hub for export-oriented
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production of agrochemicals. There has been a recent surge in the production of agrochemicals 1. What would be the reporting requirements for each of the two companies?
to overcome problems such as lack of right nutritious elements required for proper growth of Answer
crops, etc. While there is low awareness about the use and impact of agrochemicals, there is also
a push from the industries to use more agrochemicals, linking it to better yield. The continuous Both Companies A and B are among part of top 1000 listed companies. Hence, these companies
and increased use of agrochemicals seems to have an adverse effect on humans, animals, and have to mandatorily provide BRSR reporting (Business responsibility and Sustainability reporting) in
nature in whole. accordance with 9 principles of NGBRC as mandated by SEBI.
The toxicity levels of the agrochemicals are harmful, not only to the workers in the manufacturing
process but also to farmers, the soil, and the end consumers. The Central Insecticide Board 2. Which Company has absorbed the impacts of possible future regulatory changes? What are
(CIB) of India has categorized agrochemical toxicity levels based on a labeling system—using the steps taken by that Company for complying with the regulatory standards?
red, yellow, blue, and green labels—where red is the most toxic and green is the least. Most of Answer
the red-labeled products are banned abroad but are being sold in India due to the lack of a
Company A has absorbed impact of regulatory changes. It has decided to eliminate red- labelled
strong regulatory environment.
and yellow-labelled products from its portfolio which are toxic in nature. Besides, it has increased
In India, it is estimated that almost 25% of the total amount of agrochemicals sold are counterfeit its expenditure on R & D to meet with new regulatory norms. It has also incurred expenditure for
products. improving its labelling system which would help end users to know about the nature of the product.
The quality and the efficacy of these counterfeit products differ from the original products, All these steps have been taken by Company A for complying with regulatory standards.
which can lead to reputational damages for the companies. Agrochemical companies need to Company A is trying to meet with requirements of Principle 2 by making R & D expenditure. Further,
add barcodes or other identifying technologies to their product packaging, to allow end- use it has also eliminated red-labelled/yellow-labelled products from its portfolio. Principle 2 relates to
consumers to check for authenticity. the requirement that businesses should provide goods and services in a manner that is sustainable and
Also, since India is a multilingual country, the companies will have to publish the usage safe.
instructions in multiple languages. Besides, by adopting a friendly bar-coded packaging labelling system, company is adhering to
Company A and B are both listed companies and part of top 1000 listed companies. They are requirements of Principle 9 which states that businesses should engage with and provide value to their
engaged in the production of agrochemicals. Company A has been looking for opportunities to consumers in a responsible manner. Steps taken by a company to inform its consumers about safe and
comply with the recently launched and evolving guidelines for ESG in India while Company B responsible usage of products fall in its domain.
on the other hand is just focused to increase revenue and profits. In December 2022, Company A Since toxic agrochemicals are also harmful to workers engaged in their manufacturing process, their
made a decision to eliminate red-labeled products from its portfolio and to increase its research and discontinuation bodes well for workers in the company A in line with Principle 3 which states that
development (R&D) spending to safeguard itself from the market shift due to the new regulatory businesses should respect and promote the well-being of all employees including those in their value
norms; in 2022, it also discontinued yellow-labeled products. Company A is also planning to incur chains. By discontinuing products which are harmful to soil, company A is meeting requirements of
a small expenditure to improve their backend systems and provide for all its products a unique Principle 6 which states that businesses should respect and make efforts to protect and restore the
labeling system that is user friendly and interactive. At the other end of the spectrum, 14% of environment.
Company B’s top-selling products are derived from red- and yellow labeled products.
Initially, Company A’s phasing out of its toxic products negatively affected its revenues by 8%.
3. What would be the consideration by the auditors of Company A and B in the audit of financial
But as the country’s regulatory landscape evolves toward more stringent norms, Company A
statements?
will be cushioned for regulatory changes and thus, would not face potential future downsides.
Company B has recently witnessed a 9% year on year growth in revenue from the last financial Answer
year and is planning to increase the production of its bestselling product, an insecticide DDT, Company A is complying with regulatory norms whereas 14% of company B’s revenue are derived
categorized as red labelled by the Central Insecticide Board. from red and yellow labelled products. In fact, company B is planning to increase production of its
Company B has recently been approached by the regulatory authority for an investigation for red labelled product i.e., insecticide DDT which has been categorized as such by Central Insecticide
its products which include performing additional tests and studies to testify that its products Board. The auditor of Company B would have to keep in mind requirements of SA 250 in this regard.
have no adverse effects. Non-compliance with laws and regulations may result in fines, litigation or other consequences for the
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entity that may have a material effect on the financial statements. It can result in material misstatements.
Central Insecticide Board has already launched its investigation into products of company. All these
factors would be taken into consideration by auditor of Company B.
Auditors of Company A and Company B need to obtain audit evidence regarding compliance with
laws and regulations and audit procedures have to be designed accordingly. Auditor of Company A
can obtain assurance from regulatory compliance by the company. Fall of revenue by 8% in one year
is not a matter of concern to them as it is a transitory phase.
However, auditors of Company B would also have to take into consideration requirements of SA
570 as non-compliance with regulatory requirements could result into claims from such proceedings
which the company may not be able to satisfy.

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SUSTAINABLE DEVELOPMENT
CA Harshad Jaju
98812 92971

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INDEX

CHAPTER 1 - QUALITY CONTROL 1.1 to 1.24

SQC 1 – Quality Control for Firm

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Question 4 standards and the internal control environment.

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES: Question 7

3. Judgments made, particularly with respect to materiality and significant risks.

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SA 250 – Consideration of Laws and Regulations Question 2

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3. Which of the following statements most appropriately describes receptibilities of auditor in

SA 210 – Agreeing the Terms of

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(c) All movements of assets are accurately recorded.

Question 9 MULTIPLE CHOICE QUESTIONS (MCQS)

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SA 600 – Using the Work of Another Auditor Answer 2

Question 1 Factors to be considered while accepting the position of Principal auditor -

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• Re-performing calculations. (c) Permanent Staff of Auditor’s Network Firm

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MULTIPLE CHOICE QUESTIONS (MCQS) SA 520 – Analytical procedures

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

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4. Considering auditor’s intention to identify significant audit risks pertaining to inventory

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SA 315 and SA 330 – Risk Assessment

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Assess auditee Answer 8

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

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MULTIPLE CHOICE QUESTIONS (MCQS) Internal Control

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MULTIPLE CHOICE QUESTIONS (MCQS)

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Answer 1 • Control Environment;

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