JK SHAH CLASSES FINAL CA AUDIT

FINAL CA INTEGRATED CASE STUDY BASED MCQs:

JK SHAH CLASSES FINAL CA AUDIT.
This document Contains 4 Case Studies (in addition to the ones given in RTP
M20) which is indicative of the type of questions that can be asked in the
M20 Final CA Attempt.
The only way of preparing the case studies is to ensure that you have
conceptual clarity and you should be able to link various topics.

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Case Study 1:

While auditing Safe Insurance Ltd., you have observed that the

company is not maintaining solvency margin as required by the Act

and IRDA guidelines. The company has submitted the modified

financial plan to IRDA but there has been no approval from

IRDA. Infact, there has been a show cause notice from IRDA

asking insurance company to demonstrate reasons that why

IRDA should not apply to the court demanding winding up of the

company. You realise that things are looking really uncertain in

and hence you have requested the company to make an

assessment about its ability to continue as Going Concern.

The company has not cleared your audit remuneration dues and

hence you are planning to keep some original documents of the

company in your possession. With respect to this, please answer

the following:

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Q1: What is the requirement of a solvency margin in case of

insurance company:

a) Asset should exceed the liability by minimum of 50% of the

amount of minimum paid up share capital required to be

maintained under Section 6 of the Act.

b) Asset should exceed the liability by minimum of 30% of the

amount of minimum paid up share capital required to be

maintained under Section 6 of the Act.

c) Asset should exceed the liability by minimum of 40% of the

amount of minimum paid up share capital required to be

maintained under Section 6 of the Act.

d) Asset should exceed the liability by minimum of 50% of the

amount of minimum paid up share capital required to be

maintained under Section 5 of the Act.

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Q 2. If solvency margin falls below the prescribed limit then IRDA

can:

a) Ask the insurance company to submit a financial plan to deal

with the solvency margin

b) IF IRDA is not satisfied with the financial plan of the insurance

company then it can ask to modify the plan

c) If Insurance company is not able to convince IRDA then IRDA

can also apply to the court for winding up such company

d) IRDA has all of these rights

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Q 3. Since IRDA has issued show cause notice and it indicates

material uncertainty over going concern assumption, what is

your next step as an auditor?

a ) Ask management to prepare liquidation accounts as per SA 570

b) Ask management to perform an assessment about entity’s

ability to continue as going concern.

c) Ask management to disclose such fact clearly in the notes to

accounts.

d) Both B and C.

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Q 4. If management discloses such facts in the notes to accounts

along with the plans to overcome such uncertainty then as an

auditor, we should

a) Modify our opinion due to uncertainty over going concern.

b) Disclose such fact in material uncertainty over going concern

paragraph in the audit report

c) Highlight such matter in Key audit Matters Paragraph

d) Highlight such matter in Emphasis of Matter Paragraph.

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Q5. Auditor has decided to retain the original documents because

he has a reasonable cause that his dues are not cleared. With

regards to auditor’s actions, which of the following is the most

appropriate phrase?

a) Auditor’s action is justified as he derives right to lien over such

books and records from INDIAN CONTRACT ACT.

b) Auditor is incorrect because the books of accounts of the

company must be maintained at the premises of the company at

all times.

c) Auditor’s approach is incorrect because as per the decision of

Ethical Standard Board of the ICAI we are not allowed to retain

books of accounts even if the dues are not cleared.

d) Auditor is correct and he has unconditional right to lien.

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Case Study 2

While auditing Sarvashesth Ltd., a listed entity auditor has come

across various limitations on scope of audit such as non

co-operation from the management in providing valuation details

about their investments, denial of access to accounting modules

of the ERP systems, prohibitions on communication with the

internal auditor etc. Due to such restrictions auditor has decided

to withdraw from the engagement with immediate effect as on

28th May 2020 while auditing financial year 2020-21. Auditor has

sent his resignation letter to the audit committee and the board

intimating clearly that he wont be able to sign the limited review

report of the first quarter of Financial year 2020-21. Answer

the following questions with respect to this situation

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Q 1. As per SEBI circular dated 18th October 2019 with respect

to auditor’s resignation, which of the following is the most

appropriate phrase?

a) Auditor should raise his concerns to the chairman of audit

committee

b) Auditor can resign only after completing the limited review of

the first quarter ending 30th June 2020

c) Auditor can resign with immediate effect because there is a

limitation on scope of audit

d) Both a and b are correct.

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Q 2. With regards to resignation, which of the following

statement is correct as per Companies Act, 2013?

a) Auditor needs to submit Form ADT-3 to ROC and Company

within 30 days of resignation.

b) Auditor must submit Form ADT-3 as mentioned in option A

before resignation and seek prior permission

c) Form ADT-3 is submitted by the company to the ROC within

30 days of resignation

d) None of these

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Q3. If auditor has reasons to believe that there is a fraud

involving officers of the company then what is expected from

the auditor?

a) He should immediately report such fraud to the Board of

directors within 2 days of forming reasons to believe.

b) He should report to the Central Government within 2 days of

forming reasons to believe

c) He need not report such fraud without making a legal

determination that fraud exists

d) None of these is correct approach.

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Q4. What is the most appropriate statement regarding auditor’s

reporting responsibilities in audit report?

a) Auditor can provide disclaimer of opinion in clear terms

b) Auditor should not issue audit report in such case

c) Auditor should mention such points in Key audit matters and

provide disclaimer of opinion in audit report.

d) None of the above is correct.

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Q5. Which of the following statement is correct with regards

to statutory reporting requirements in audit report?

a) Auditor can make a written statement to ROC regarding such

restrictions

b) Auditor needs to comment under section 143(3)(a) of

Companies Act,2013

c) Auditor needs to send a written report to SEBI as per

SEBI audit regulations.

d) None of the above statements are correct.

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Case Study 3

While auditing Dharma Ltd., in auditor has observed that there are

certain regulatory dues which have not been cleared by the

company, the details of which are as follows

(i) Vat duty assessment with Appellate Tribunal related

to financial year 1415 pending as on 31st March 2020

(ii) GST dues which were supposed to be paid as on 20th July

2019 but not cleared till 31st March 2020. The company does not

have any dispute against such dues.

Apart from the above regulatory dues, your audit team has also

informed you regarding the show cause notice from pollution

control board for which the company needs to provide a

satisfactory response within 30 days (notice received as on 15th

March 2020). The notice details about company’s violation

of carbon emission norms and failure to treat waste water.

With respect to this, answer the following questions:

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Q1. With respect to checking compliance with laws and regulations

which one of the following statement is correct?

a) Auditor needs to verify compliance with all laws and

regulations which govern the entity

b) Auditor needs to verify compliance with laws governing

applicable financial reporting framework

c) Auditor needs to verify compliance with such laws which can

have a material effect on the financial statements whether

directly or indirectly.

d) Auditor needs to check compliance with laws only if non-

compliance is of such significance that it can impact the financial

statements

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Q2. Which one of the following is the most appropriate phrase

regarding auditor’s reporting responsibility?

a) Auditor should report non-compliances under emphasis of

matter paragraph highlighting the provision entries or disclosures.

b) Auditor should report in detail about taxation dues but ignore

the pollution control board notice as it does not fall under the

scope of financial audit

c) Auditor needs to report about Vat duty assessment under

Clause vii of CARO 2016

d) Both a and c are appropriate.

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Q3. Regarding the GST dues, what should we expect in the

auditor’s report?

a) Qualified opinion as it is unpaid

b) Comments under Clause vii of CARO 2016

c) Comments along with details about the total amount under

Clause vii of CARO 2016

d) Non-Payment of dues creates uncertainty over Going Concern

and hence a comment under “Material Uncertainty Over Going

Concern Para”

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Q4. If, in your opinion, auditor should be concerned about

environment protection laws, then what should be auditor’s

approach?

a) Obtain Further Understanding of the act and the nature

non-compliance including its probable effect on the financial

statements

b) Discuss the matter with management and where appropriate

those charged with governance to obtain additional information

on non-compliance

c) Both a and b are correct

d) None of the statements are correct because auditor should

not be concerned about such laws.

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Q5. Do you think that a written representation is required

from the management in this situation? If yes, then what should

be the content of such representation?

a) Written Representation is not required unless there is a

doubt about non-compliance

b) Written representation that entity has disclosed to the auditor

any known or suspected non-compliance with laws and regulation

c) Written representation that entity has disclosed non-

compliance with laws and regulations in the financial statements

as per applicable financial reporting framework

d) Both b and c are correct.

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Case Study 4

Suprabhat Ltd. has appointed ABC firm and PQR firm as an auditor

of the company in the AGM of FY 2018-19. ABC firm and PQR firm

have decided to divide the financial items between them and they

have documented the scope of audit. Work allocation document has

been signed by all joint auditors and also communicated to Those

charged with Governance. With respect to inventory verification,

Joint auditors have decided to keep physical verification of inventory

as a common audit area. MR. A, engagement Partner on behalf of

ABC firm and Mr. P, engagement partner on behalf of PQR firm

discussed the checklist of physical verification, instructed their

assistants and engaged an expert (for assessing the work in

progress). Mr. A’s assistants were sent to some locations whereas

Mr. P’s assistants were sent to other locations. Mr. A’s assistants

were ignorant in the work and they gave wrong details to Mr. A.

Mr. P’s assistants were vigilant and gave correct details along with

observation. Immediately, after the stock verification was done,

Mr. A and Mr. P signed a stock audit certificate which was then sent

to the Bank manager of Suprabhat Ltd., who assessed the drawing

power of Suprabhat Ltd., based upon such stock audit certificate.

Later on, the bank which gave cash credit/overdraft to Suprabhat

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Ltd., sent its own officers and found that stock was overstated

and mismanaged. There were no proper records of the stock and

surprisingly the auditors had given a clean report. Suprabhat Ltd.,

has already withdrawn 2 crores against a CC/OD limit of 3 crores.

Bank revised the limit to 1.5 crores due to overstatement of stock.

Suprabhat Ltd., didn’t rectify this deficit for 2 quarters. Additionally,

Bank has filed a complaint against the auditors for negligent

approach which led to the wrong decision by the bank. With respect

to this case study, please answer the following:

Q1. IF the overstated stock belonged to such locations where

Mr. A’s assistants had visited and performed work in a negligent

manner then which statement is the most appropriate for fixing the

liability?

a) Mr. A’s assistants will be held responsible for negligence

b) Mr. A should be held liable due to work division regarding the

locations to be visited.

c) Mr. A and Mr. P both will be held liable due to common area of

work.

d) None of them is liable due to inherent limitations of audit.

Q2. Since the amount withdrawn by Suprabhat ltd., has exceeded

the drawing power, which one of the following is the most

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appropriate:

a) Amount withdrawn exceeds drawing power and the deficit

remains for more than 90 days then it is tagged as out of order.

b) Amount withdrawn exceeds the drawing power and such deficit

remains for three days then tagged as out of order

c) Amount withdrawn exceeds the drawing power and deficit

remains for more than 180 days then its NPA

d) Amount withdrawn is within the drawing power and the deposit

amount is not sufficient to cover the interest charged for more than

90 days then its NPA.

Q3. ABC firm and PQR firm have divided the work based upon the

financial items. What are the other ways of dividing the work?

a) Based upon area of expertise.

b) Based upon Geographical areas

c) Based upon accounting period

d) All of these.

Q4. IF the ICAI finds that MR. A didnot exercise adequate skill and

care then he would be held liable under which clause?

a) Clause 5 of Part I of Second Schedule to CA Act, 1949.

b) Clause 6 of Part I of Second Schedule to CA Act, 1949.

c) Clause 7 of Part I of Second Schedule to CA Act, 1949.

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d) All of these.

Q5. If Mr. A claims that physical verification of inventory was a

common area and hence it should be a joint liability of Mr. A and

Mr. P, then which of the following statement is principally correct?

a) As per SA 299, joint auditors have joint and several liability

undivided scope of audit and hence MR. A’s claim is correct.

b) As per SA 299, joint auditors have joint and several liability for

audit planning regarding common audit areas and deciding the

nature, timing and extent of audit procedures for such areas. In

this case mistake happened at the time of execution which was

allocated to MR. A and hence Mr. P cant be liable.

c) Both a and b are incorrect.

d) There is no academic principle to decide this case. It depends

upon the person judging this case.

Answers:

Case study 1

Q1- a

Q2- d

Q3- d

Q4- b

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Q5- c

Case Study 2

Q1-d

Q2-a

Q3-a

Q4-a

Q5-b

Case Study 3

Q1-c

Q2-d

Q3-c

Q4-c

Q5-d

Case Study 4

Q1-b

Q2-a

Q3-d

Q4-c

Q5-b

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