CA INTER AUDIT PAPER

July - 2021
Paper Review By CA Kapil Goyal

Qus Question Langusgae Chapter Name Ch. Marks Answer Page No -

Number Kapil Sir
Book
1A Mis-statement in the financial statement is Fraud 5 2 Incorrect- Misstatements in the financial statements can arise from either fraud or error. 5.15
always because of fraud The distinguishing factor between fraud and error is whether the underlying action that results in
the misstatement of the financial statements is intentional or unintentional. The auditor is
concerned with fraud that causes a material misstatement in the financial statements.

B The First Auditor of Multi-state co-operative Different types 13 2 Incorrect- First auditor to be appointed by board within one month of registration date to hold 13.34
society will be appointed in AGM of entity office until conclusion of 1st AGM. If board fails to appoint first auditor then appointment shall be
mad e in general meeting.

C Assertion refers the representation made by the Item of 12 2 Incorrect - SA 315 "Identifying and Assessing the Risk of Material Misstatements through 12.3
auditor to consider the different types of the Financial Understanding the Entity and its Environment" defines the term assertion as "Representations by
potential misstatement that may occus. Statement management, explicit or otherwise, that are embodied in the financial statements, as used by the
auditor to consider the different types of potential misstatements that may occur."

D There is only a thin difference between advocacy Nature of Scope 1 2 Incorrect 1.21
threat and intimidation threats to an auditor while of Auditing Advocacy threats- It may occur when a professional accountant promotes a position or opinion to
performing his duty. the point that subsequent objectivity may be compromised.

Intimidation threats- which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.

E In Stratified sampling , the conclusion drawn on Audit Sampling 7 2 Incorrect - The results of audit procedures applied to a sample of items within a stratum can only 7.7
each stratum can be directly projected to the be projected to the items that make up that stratum. To draw a conclusion on the entire population,
whole population the auditor will need to consider the risk of material misstatement in relation to whatever other
strata make up the entire population.
F With Reference to General IT control, the Automated
objective of data center and network operation is Environment
to ensure that system are developed , configured
and implimented to meet financial reporting
objectives.
G In the context of Related party , the potential SA 550
effects of Inherent limitation of the auditor ability
to detect material misstatement are greater.
H The location of the descryption of the auditor Audit report
responsibilty for the audit of the financial
statement is always within the body of the auditor
report.
Question 2
A What all activities in the planning phase should Audit
form part of the auditors documentation? State Documentation
with examples
6 2 Incorrect - 1.Data Center and Network Operations 6.6
Objective: To ensure that production systems are processed to meet financial reporting objectives.
Whereas Application system acquisition, development & maintenance objective is to ensure that
systems are developed, configured and implemented to meet financial reporting objectives.
3 2 Correct - Many related party transactions are in the normal course of business. In such 3.23
circumstances, they may carry no higher risk of material misstatement of the financial statements
than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some circumstances,
give rise to higher risks of material misstatement of the financial statements than transactions with
unrelated parties
10 2 Incorrect - Description of the auditor’s responsibilities for the audit of the financial statements 10.6
shall also be made:
1.Within the body of the auditor’s report;
2.Within an appendix to the auditor’s report, in which case the auditor’s report shall include a
reference to the location of the appendix; or
3.By a specific reference to the location of such a description on a website of an appropriate
authority, where law, regulation or the auditing standards expressly permit the auditor to do so.
3 4 (a)The nature, timing and extent of planned risk assessment procedures, as determined under 3.3 , Also
SA 315 "Identifying and Assessing the Risks of Material Misstatement through Understanding the link to
Entity and Its Environment". Planning
(b)The nature, timing and extent of planned further audit procedures at the assertion level, as phase in
determined under SA 330 "The Auditor's Responses to Assessed Risks". ch 2
(c)Other planned audit procedures that are required to be carried out so that the engagement
complies with SAs
(d) The size and complexity of the entity.
(e) The nature of the audit procedures to be performed.
B CA B is appointed as an auditor of M/s Divine Audit Sampling 7
pharmacy. While auditing CA B wants to use
Test Check technique. Advise CA B , what kind
of precautions should be taken by him in this
regard.
C In Case of Certain subject matter , limitation on Internal Control 4
the auditor ability to detect material misstatement
are particularly significant. Explain such
assertion or subject matter.
D The statutory auditor of ABC Ltd., CA Raj Analytical
identifies certain inconsistencies while applying Procedure
analytical procedures to the financial and non-
financial data of ABC Ltd. With reference to SA
520 on “Analytical Procedures” how CA Raj
shall investigate such differences?
4 7.2
3 (a)Whether the risk is a risk of fraud; 4.15
(b)Whether the risk is related to recent significant economic, accounting, or other developments
like changes in regulatory environment, etc., and, therefore, requires specific attention;
(c)The complexity of transactions;
(d)Whether the risk involves significant transactions with related parties;
(e)The degree of subjectivity in the measurement of financial information related to the risk,
especially those measurements involving a wide range of measurement uncertainty; and
(f)Whether the risk involves significant transactions that are outside the normal course of
business for the entity, or that otherwise appear to be unusual.
You can also write points from Chapter 1 Inherent Limitation of Audit.
8 3 If analytical procedures performed in accordance with SA 520 identify fluctuations or 8.11
relationships that are inconsistent with other relevant information or that differ from expected
values by a significant amount, the auditor shall investigate such differences by:
(i)Inquiring of management and obtaining appropriate audit evidence relevant to management's
responses:
Audit evidence relevant to management's responses may be obtained by evaluating those
responses taking into account the auditor's understanding of the entity and its environment, and
with other audit evidence obtained during the course of the audit.
(ii)Performing other audit procedures as necessary in the circumstances:
The need to perform other audit procedures may arise when, for example, management is unable
to provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management's response, is not considered adequate.
Question 3
A The Auditor shall perform audit procedure
designed to obtain sufficient appropriate audit
evidence that all event between the date of the
financial statement and the date of the auditor
report, that requires adjustment of , or disclosure
in , the financial statement have been identified.
with reference to SA 560 what are the audit
procedure included in the auditor risk
assessment.
B Explain with reference to SA 505 external
confirmation all the condition that should be
present to use negative confirmation request as
the sole substantive audit procedure to address an
assessed risk of material misstatement at the
assertion level.
SA 560 3 4 Audit procedures included in the auditor's risk assessment as per SA 560. The auditor shall : 3.27
a.Obtain an understanding of any procedures management has established to ensure that
subsequent events are identified.
b.Inquiring of management and TCWG.
c.Read minutes, if any. of the meetings, of the entity’s owners, management and those charged
with governance, that have been held after the date of the financial statements.
d.Read the entity’s latest subsequent interim financial statements, if any.
If 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.
SA 505 3 4 Negative confirmation request- A request that the confirming party respond directly to the auditor 3.15
only if the confirming party disagrees with the information provided in the request.
condition that should be present to use negative confirmation request as the sole substantive audit
procedure to address an assessed risk of material misstatement at the assertion level are,
•Risk of misstatement is low
•I.C is effective
•Item contains small amount
•Low exception rate is expected
•No reason to believe that recipient may disregard the request.
C CA L is in the process of finalizing his risk SA 500
assessment procedure of effluent limited which
include observation and inspection that may
support inquiries of management and others.
Discuss few examples of audit procedure which
include observation or inspection of the entity
operation.
D Foreceful Limited is a company dealing in mobile Audit in
spare parts and having its showrooms in almost Automated
all the states in the country. For FY 2020-21, the environment
company transferred its accounts from manual to
computerized system (SAP). PQR & Co.,
Chartered Accountants have specialization in the
system audit and have been appointed as the
system auditor. PQR & Co.,at the end of the
audit concludes that there are certain findings or
exceptions in IT environment and IT controls of
the company which needs to be assessed and
reported. Mention those points of consideration.
Question 4
3 3 Inspection consists of examining records, documents whether internal or external, in paper form, 3.11
electronic form, or other media, or a physical examination of an asset.
Observation consists of looking at a process or procedure being performed by others.
Some examples of audit procedure which include observation or inspection of the entity operation
for finalizing his risk assessment procedure can be,
1- The auditor's observation of inventory counting by the entity's personnel, or of the performance
of control activities.
2- Inspection of document constituting a financial instrument such as a inventory or bond.
3- Inspection of internal records and documents, on the effectiveness of the controls over their
production.
6 3 At the conclusion of each audit, it is possible that there will be certain findings or exceptions in IT 6.9
environment and IT controls of the company that need to be assessed and reported to relevant
stakeholders including management and those charged with governance viz., Board of directors,
Audit committee [Students may refer SA 260 (Revised)Communication with Those Charged with
Governance for more details] Some points to consider are as follows:
•Are there any weaknesses in IT controls?
•What is the impact of these weaknesses on overall audit?
•Report deficiencies to management - Internal Controls Memo or Management Letter.
•Communicate in writing any significant deficiencies to Those Charged With Governance.
A CA “X” while conducting an audit of Joyful Ltd. Audit of Item of 12
found a considerable increase in sales as FS
compared to the previous year, he doubts that
few fictitious sales have been recorded by the
company to overstate its revenues. Discuss any
four audit procedures to be undertaken by the
auditor to ensure revenue from sales of goods and
services performed during the period is not
overstated?
4 1.The auditor should examine whether the entity has instituted adequate cut-off procedures in 12.33
relation to sales and sale returns.
2.The auditor should examine selected entries inthe sales journal with reference to the related
sale invoices, dispatch documents and other supporting documents.
3.The auditor should examine selected entries in the sales return journal with reference to the
receiving reports in respect of goods returned, credit notes and other supporting documents.
4.In respect of goods sent on approval, the auditor should particularly examine that revenue in
respect of such goods is not recognised until
(a)the goods have been formally accepted by the buyer, or
(b)the buyer has done an act adopting the transaction, or
(c)the time period for rejection has elapsed or where no time has been fixed, a reasonable time
has elapsed.
5.In respect of sales to intermediate parties, the auditor should examine that revenue from such
sales is not recognised until the significant risks and rewards of ownership have passed.
6.Where the consideration is receivable in instalments and includes an element of interest, the
auditor should examine that the revenue attributable to the sale excludes the interest element.
7.In respect of export sales, the auditor should carry out the following additional procedures:
(a)The auditor should examine that revenue from export sales in which consideration is
receivable in a foreign currency is recorded at an appropriate amount in accordance with AS 11,
Accounting for the Effects of Changes in Foreign Exchange Rates.
(b)The auditor should obtain a written representation from the management to the effect that the
entity has complied with the legal and regulatory requirements relating to exports.
8.In respect of revenue arising from services rendered, the auditor should examine the related
agreements and other documents.
B You have been appointed as an auditor of a
health care service provider. Briefly discuss the
special points that should be kept in mind as an
auditor for developing an audit programme.
Audit Planning 2 4 2.4.6Developing the Audit Programme 2.13
1.Written Audit Programme: The auditor should prepare a written audit programme setting forth
the procedures that are needed to implement the audit plan.
2.Audit Objective and Instruction to Assistants: The programme may also contain the audit
objectives for each area and should have sufficient details to serve as a set of instructions to the
assistants involved in the audit and as a means to control the proper execution of the work.
3.Reliance on Internal Controls: In preparing the audit programme, the auditor, having an
understanding of the accounting system and related internal controls, may wish to rely on certain
internal controls in determining the nature, timing and extent of required auditing procedures. The
auditor may conclude that relying on certain internal controls is an effective and efficient way to
conduct his audit. However, the auditor may decide not to rely on internal controls when there are
other more efficient ways of obtaining sufficient appropriate audit evidence. The auditor should
also consider the timing of the procedures, the coordination of any assistance expected from the
client, the availability of assistants, and the involvement of other auditors or experts.
4.Timings of Performance of Audit Procedures: The auditor normally has flexibility in deciding
when to perform audit procedures. However, in some cases, the auditor may have no discretion as
to timing, for example, when observing the taking of inventories by client personnel or verifying
the securities and cash balances at the year-end.
5.Audit Planning: The audit planning ideally commences at the conclusion of the previous year's
audit, and along with the related programme, it should be reconsidered for modification as the
audit progresses. Such consideration is based on the auditor's review of the internal control, his
preliminary evaluation thereof, and the results of his compliance and substantive procedures.
C The value of intangible assets may diminish due Item of 12
to efflux of time, use and/or obsolescence. The Financial
diminution of the value represents cost to the Statement
entity for earning revenue during a given period.
Discuss the audit procedures to be applied by the
auditor to ensure that Intangible assets have been
valued appropriately and as per generally
accepted accounting policies and practices.
D Care Ltd. is an unlisted public limited company, Internal Control 4
During the financial year 2019-20, the paid- up
share capital of Care Ltd. was INR 50 crore and
the turnover was INR 180 crore. During the
financial year 2020-21, the Board of Directors of
the company appointed an internal auditor.
Whether Care Ltd. is required to appoint an
internal auditor according to the provisions of the
Companies act, 2013?
Question 5
3 An intangible asset is an identifiable non-monetary asset, without physical substance, held for use 12.24
in the production or supply of goods or services, for rental to others, or for administrative
purposes. Auditor should check the following points for valuation,
1.Auditor should ensure that intangible asset should be recognised only if (a) it is probable that
the future economic benefits that are attributable to the asset will flow to the enterprise; and (b)
the cost of the asset can be measured reliably
2.Ensure that at initial stages, intangible asset should be measured at cost. After initial
recognition an intangible asset should be carried at its cost less any accumulated amortisation and
any impairment losses.
3.Ensure that if an item covered does not meet the definition of an intangible asset, expenditure
to acquire it or generate it internally is recognised as an expense when it is incurred.
4.In some cases, an asset may incorporate both intangible and tangible elements that are, in
practice, inseparable. Ensure that in determining whether such an asset should be treated under AS
10, "Property, Plant and Equipment”, or as an intangible asset under AS 26, "Intangible Assets”
appropriate judgment has been taken to assess as to which element is predominant.
5.Auditor should also ensure that proper disclosure is made in the financial statements about the
carrying amount, amortisation methods, useful lives, etc. in compliance of AS 26 and Schedule III
to the Companies Act, 2013.
3 Sec. 138 shall apply only to such class or classes of companies as may be prescribed. As per Rule 4.38
13 of the Companies (Accounts) Rules, 2014, following class of companies shall be covered u/s
138,
Every unlisted public company having -
(i) paid up share capital of Rs. 50 crore or more during the preceding financial year; or
(ii) turnover of Rs. 200 crore or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100
crore or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of Rs. 25 crore or more at any point of time during the preceding
financial year.
The paid-up share capital of Care Ltd. for the financial year 2019-20 was ₹ 50 crore and the
turnover was ₹ 180 crore.
As the paid-up capital is ₹ 50 Crores during the preceding financial year, Care Ltd. is required to
appoint an internal auditor during the financial year 2020-21
A Shine Industries is an electricity generating Company Audit 11
company engaged in generation of electricity for
captive consumption. Its gross turnover was INR
68 crores during the immediately preceding
financial year. Management of shine industries
has not maintained any cost records as they felt
that there is no requirement for them to maintain
any cost records or conduct any cost audit.
Comment.
B The recommendation for appointment of auditors Company Audit 11
is only one of the several functions performed by
audit committee. Discuss at least four other key
responsibilities of Audit Committee in
accordance with Section 177 of the Companies
Act, 2013.
4 Applicability for Maintenance of Cost Records: Rule 3 of the Companies (Cost Records and 11.27
Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or
providing services, having an overall turnover from all its products and services of Rs. 35 crore or
more during the immediately preceding financial year, required to include cost records in their
books of account. These companies include Foreign Companies defined in sub-section (42) of
section 2 of the Act, but exclude a company classified as a Micro enterprise or a Small enterprise
including as per the turnover criteria provided under Micro, Small and Medium Enterprises
Development Act, 2006. The said rule has divided the list of companies into (A) Regulated sectors
and (B) Non-regulated sectors.
Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 states the provisions related to the
applicability of cost audit depending on the turnover of the company as follows-
(i)Classes of companies specified under item (A) “Regulated Sectors” are required to get its cost
records audited if the overall annual turnover of the company from all its products and services
during the immediately preceding financial year is Rs. 50 crore or more and the aggregate
turnover of the individual product(s) or service(s) for which cost records are required to be
maintained under rule 3 is Rs. 25 crore or more.
(ii)Classes of companies specified under item (B) “Non-Regulated Sectors” are required to get its
cost records audited if the overall annual turnover of the company from all its products and
services during the immediately preceding financial year is Rs. 100 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which cost records are required to
be maintained under rule 3 is Rs. 35 crore or more.
Company is required to maintain cost records as its turnover during the preceding financial year
exceeds ₹ 35 Crores. However, provisions related to cost audit shall not apply because companyis
4 engaged in generation
As per provisions of electricity
of Section 177 of for captive consumption
Companies through Captive
Act, audit committee performsGenerating Plant. 11.15
importantfunctions including making recommendation forappointment,
1- remuneration and terms of appointment of auditor of the company
2- reviewing and monitoring auditor’s independence and performance & effectiveness of audit
process,
3- examination of financial statements and auditor’s report thereon.
4- helps in ensuring better standards of corporate governance.
C List out any three circumstances which induces Fraud
the management/employee to commit the fraud.
D CA Guru is in the process of preparing the final Audit Report
audit report of JPA Private Limited and would
like to disclaim his opinion on the financial
statements due to an inability to obtain sufficient
appropriate audit evidence. How CA Guru shall
amend the description of the auditor's
responsibilities as required by SA 700 (Revised)?
Question 6
A N Ltd. has been sanctioned a Cash Credit Facility Bank Audit
by XYZ Bank Ltd. for INR 1 crore and drawing
power as per the Stock Statements furnished for
the last quarter is INR 80 Lakh. Outstanding
balance in the account is INR 75 lakh. Interest
charged to the account is INR 3.5 Lakh and total
credit into the account for the quarter is INR 2.5
Lakh. As an auditor how will you report this
account in your report.
A (Option)
Define Government Audit and explain its Different types
objectives. of Entity
5 3 Circumstances which induces the management/employee to commit the fraud are as below, 5.7
1- Financial obligations/ Pressure
2- Management's unrealistic goals
3- Dissatisfied Employees or Lack of motivation among employees
4- Name game (eg. management using power of authority by asking employees to do something
illegal).
5- Opportunity to commit fraud.
10 3 When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit 10.14
evidence, the auditor shall:
(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 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
(c)Amend the statement required by SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit the financial
statements
14 4 The account would be termed as OUT OF ORDER if :- 14.17 (
•the outstanding balance remains continuously in excess of the INR 80 lacs/75 lacs whatever the Same
case may be ; or question
•The outstanding balance in the account is less than INR 75 lacs but there are no credits or any given as
payments deposited into this account continuously for 90 days as on the date of Balance Sheet ; or example)
•credits are there upto say INR 2.5 lakhs but are not enough to cover the interest debited during
the same period which is around INR 3.5 lakhs.
Auditor should report this account as NPA if all the above conditions are satisfied.
13 4 1.Government audit means 13.23
■the systematic and independent examination,
■of financial, administrative and other operations of a public entity,
■For evaluating and verifying them.
2.Its objective is to ensure the accountability of the government entity in respect of public
revenue and expenditure.
3.Auditor presents a report containing audit findings along with recommendations for future
actions.
4.In India, the function of government audit is performed by Comptroller and Auditor General
B You have been appointed as an auditor of VJM Different types
Schools. Discuss the points which merit your of Entity
consideration as an auditor while verifying assets
and Liabilities of VJM Schools.
13 4 1.Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing 13.4
Committee.
2.Confirm that caution money and other deposits paid by students on admission, have been
shown as liability in the balance sheet not transferred to revenue, unless they are not refundable.
3.See that the investments representing endowment funds for prizes are kept separate and any
income in excess of the prizes has been accumulated and invested along with the corpus.
4.Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs,
clothing and other equipment is efficient and all bills are duly authorised and passed before
payment.
5.Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These
should be checked by reference to Inventory Register or corresponding inventories of the previous
year and values applied to various items should be test checked.

C Tomo Construction Engineering LLP approached Company Audit 11
CA K to understand various returns to be
maintained and filed by them. Guide/Discuss the
various returns to be maintained and filed by
them.
3 An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its 13.28
state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed by
every LLP with the Registrar every year.
Every LLP would be required to file annual return in Form 1 1 with ROC within 60 days of closer
of financial year. The annual return will be available for public inspection on payment of
prescribed fees to Registrar.

D Discuss the advantages of engagement team
discussion done at the planning stage of the bank
audit.
Bank Audit 14 3 The engagement team should hold discussions to gain better understanding of the bank and its 14.6
environment, including internal control, and also to assess the potential for material misstatements
of the financial statements. All these discussions should be appropriately documented for future
reference. The discussion provides:
An opportunity for more experienced engagement team members, including the audit
engagement partner, to share their insights based on their knowledge of the bank and its
environment.
An opportunity for engagement team members to exchange information about the bank’s
business risks.
An understanding amongst the engagement team members about effect of the results of the risk
assessment procedures on other aspects of the audit, including decisions about the nature, timing,
and extent of further audit procedures.
The discussion between the members of the engagement team and the audit engagement partner
should be done on the susceptibility of the bank’s financial statements to material misstatements.
These discussions are ordinarily done at the planning stage of an audit.

Ch Chapter Name Marks Some Important Links for your reference

1 Nature , Objective and scope of Audit 2 YouTube - CA Kapil Goyal Audit Discussion
2 Audit Planning 4 https://www.youtube.com/channel/UCNKeZC76djN7iccLrNe0jMw
3 SA 500 Series 17 Telegram - Audit With Kapil
4 Internal Control 6 https://t.me/auditwithkapil
5 Fraud 5 Website for Lecture Purchase = www.caindia.org
6 Automated Environment 5 https://www.caindia.org/
7 Audit Sampling 6 Instagram
8 Analytical Procedure 3 CA Kapil Goyal (@ca_kapil_goyal) • Instagram photos and videos
9 SA 299 and Standards 0
10 Audit report 5
11 Company Audit 11
12 Audit of Item of FS 9
13 Audit of different types of entity 10

14 Bank Audit 7