CA FINAL I PAPER 3

CA FINAL I PAPER 3
Advanced Auditing
and Professional
Ethics
INDEX
VOL-2
SR.NO TOPICS PAGE NO
1. Corporate Governance 01-16
2. CFS 17-30
3. Bank Audit 31-57
4. Insurance Audit 58-77
5. LLP 78
6. Co-operative Society (Only for Old Course) 79-84
7. Audit of NBFC 85-95
8. Tax Audit 96-129
9. Cost Audit (Only for Old Course) 130-135
10. PSU Audit 136-141
11. M&O Audit 142-153
12. Due Diligence 154-159
13. Forensic Audit (Only for New Course) 160-165
14. Investigation 166-174
15. Peer Review 175-179
16. Quality Review (Only for New Course) 179-182
17. Professional Ethics 183-260
18. Others 261-262
19. Miscellaneous 263

x CNO – Concept Number.

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CORPORATE GOVERNANCE AUDIT

CNO Corporate Governance (N04E, N11R, M13M, M14R, M15R, P17M)

420.0
Write a short note on Corporate Governance.
Answer Part I -- Relevant Standards & Laws
LODR, 2015
Part II Requirements of Relevant Standards & Laws
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any mandatory requirement i.e. which is part of the LODR with reasons thereof and the extent to
which the non-mandatory requirements have been adopted, should be specifically highlighted.
Certificate from the statutory auditor or practicing CA of the entity regarding
compliance
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CNO LODR (N15E, M17R, N18R)
421.0
Enumerate the issues addressed in the SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 regarding Corporate Governance
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LODR, 2015
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Author’s Note
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CNO Audit Committee -Features (N08E, N13R, M14R, N15R, M15R, S17M, P17M) / (N17E, M18R) / (M18M)
422.0 / (M16M, N16R, N16M, N17M) / (M04E, M11R, N14R, P17M, M19R/N18M)
State the main features of the Qualified and Independent Audit Committee set up under LODR,2015
OR
Key features of the Qualified and Independent Audit Committee set up under SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015..
OR
“Every listed entity shall constitute a qualified and independent audit committee in accordance with the
terms of reference.” State the main features of the Qualified and Independent Audit Committee set up
under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
OR
Classes of Companies Required to Constitute Audit Committee
OR
Explain the Constitution of Audit Committee under Section 177 of the Companies Act, 2013
OR
Audit Committee under LODR Vs Company Act 2013
Answer Main features of the Qualified and Independent Audit Committee Applicability of LODR -
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Particulars LODR Companies Act
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In order of their risky nature or PAINS2MF
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For the purpose of better understanding of students, comparison of features Audit Committee under
Companies Act and LODR is provided. Students are only required to write about different aspects of audit
committee as per LODR or Company Act depending on question.

CNO Audit Committee -Functions (M04E, M11R, N13R,M15R,M19R)
422.05
You are required to elucidate the functions of the Audit Committee as per section 177 of the Companies
Act, 2013
Section 177 of the Companies Act, 2013
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x (However, the Audit Committee may make omnibus approval for related party
transactions proposed to be entered into by the company subject to such conditions
as may be prescribed.
x In case of transactions other than transactions referred to in section 188 of the
Companies Act 2013, and where Audit Committee does not approve the
transaction, it shall make its recommendations to the Board.
x These provisions shall not apply to a transaction, other than a transaction referred
to in section 188, between a holding company and its wholly owned subsidiary
company
x Also, in case any transaction involving an amount not exceeding Rupees 1 crore is
entered into by a director or officer of the company without obtaining the approval
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of the Audit Committee and it is not ratified by the Audit Committee within three
months from the date of the transaction, such transaction shall be voidable at the
option of the Audit Committee and if the transaction is with the related party to any
director or is authorized by any other director, the director concerned shall
indemnify the company against any loss incurred by it.

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Author’s Note
x Text in italics are the amendment in RTP
x Instead of above students can also use points mentioned in CNO 429.01

CNO Risk Management Committee (Applicability) (M18E, N18M)
422.10
M/s All -in-One Limited is a large-sized listed Indian Company with focus on design and delivery of custom-
made Information Technology applications for various business entities in India and abroad. The
Management wants to know whether they are required to constitute Risk Management Committee as per
LODR, 2015 and if so, required, what should be its composition? Advise.
Regulation 21 of LODR, 2015
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CNO Audit Committee (Mandatory Review) (M12E, M16M, P17M, M18M, N18E)
425.0
State the "Mandatory Review" areas of the audit committee.
OR
List few documents that require mandatory review by Audit Committee.
LODR, 2015
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CNO Audit Committee (Meeting) (N13E, M15R, N16R, S17M, P17M, N17R,
426.0 N18R,N19E)
PSU Limited, a company incorporated in India has six members in its Audit Committee. Due to recessionary
conditions in India the revenue of the company is going down and there is slow down in other activities of
the company. Therefore, it was expected that there would not be significant work for members of the
Audit Committee. Considering the overall recession in the company and the economy, the members of the
Committee decided unanimously to meet once in a year only on March 31, 2018. They reviewed monthly
information system of the Company and found no errors. As an auditor of PSU Limited would you consider
the decision taken by the Audit Committee is in line with the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015?
Answer
Part I -- Relevant Standards & Laws
LODR, 2015
¾ Audit Committee Meetings:
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at least four times in a year and not more than one hundred and twenty days shall elapse between
two meetings. The quorum shall be either two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum of two independent directors
present

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CNO Audit Committee (Power) (M17M)

427.0
Power of Audit Committee as stipulated under SEBI (Listing Obligations and Disclosure Requirements)
Regulations.
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Audit committee power: - OOII powers
I- Investigate / I- seek Information from employee / O-Obtain professional advice / O-secure
attendance of Outsiders with relevant expertise.

CNO Audit Committee (Role of Auditor) (M17R)
429.0
Briefly explain the role of auditor in audit committee and certification of compliance of conditions of
Corporate Governance.
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an assurance as to the future viability of the company, nor the efficiency or effectiveness with
which the management has conducted the affairs of the company.
Author’s Note
Role of auditor in audit committee – C2ARVE
1. R- Right to be heard in meetings
2. C- Communicate frequently with audit committee on key issues
3. C- address Concern voiced by audit committee
4. A-Advice to improve corporate governance, oversight of financial reporting process,
implementation of accounting policies and practices, compliance with accounting standards,
strengthening of the internal control systems
5. V-The auditor’s responsibility in certifying compliance with the requirements of corporate
governance relates to the Verification and certification of factual implementation of requirements
of corporate governance
6. E-Such verification and certification is neither an audit nor an Expression of opinion on the
financial statements of the company.

CNO Audit Committee (Role of Audit committee) (M09R, M16R)
429.01
The audit committee has been granted several roles under Clause 49 of the Listing Agreement Oversight
of the company’s financial reporting process; recommendation for appointment of auditors; approval of
payment to statutory auditors etc are some of the roles that an audit committee perform State the role
of Audit Committee as provided under Clause 49 of the Listing Agreement
Answer ¾ The role of the audit committee shall include the following:
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Below is the chart of the above, students can refer it for quick overview.
7
11.Review Auditors 12. Recommendation for Appointment of Statutory

Independence Audit & terms of appointment

2.Review Risk Management System

Statutory 13.Nature & Scope of Audit before start of Audit, also
Audit review performance and effectiveness.
3.Review Internal Financial Controls
15. Recommend 14.Discussion Post Audit
remuneration & approval regarding area of concern
1.Approval of 4. Oversight of Financial Reporting Process &
of payment for any other
Appointment
18. Reviewing
services
of CFO
5.Statemen 6.Reviewing 7.Reviewing performance of Internal

t of Uses & Quarterly Annual 16. Adequacy of Internal Auditor
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Application Financial Financial Statutory Auditor

Audit Function
Statements Statements & Audit Internal Control System
of Funds
before sub to Report before to
(IPO/ FPO) Internal
BOD submission to BOD 17.Significant Findings of

Audit Internal Audit

8A. 9.Reason for 10.Approval / 19.Findings of
8.Valuation of
Scrutiny of Modifications Internal Investigation Any Other Function
default in
undertaking as mentioned in
Inter payment to of Related Party
or assets of
Corporate Transactions terms of the Audit
company depositors /
Loans & 20.Whistle Blower Committee
debenture
Advances
holders / Mechanism
share holders
Reviewing
the utilization of loans/advances/investment by the holding in the subsidiary exceeding 100 Cr or
10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments.
auditguru in 5 15

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CNO Auditor's Certificate (N16E, M18E, N18M,N19E)
431.0
The auditor of Mould Limited made an adverse statement in his certificate as the Audit Committee of the
company did not meet four times a year. Discuss few circumstances which require an adverse or qualified
statement in the auditor’s certificate in respect of compliance of the requirements of Corporate
Government.
OR
Some situations may require an adverse or qualified statement or a disclosure without necessarily making
it a subject matter of qualification in the Auditors’ Certificate, in respect of compliance of requirements of
corporate governance. Give four examples of such situations.
OR
A listed entity has to obtain a compliance certificate from either the statutory auditors or practicing
company secretaries regarding compliance of conditions of corporate governance and annex it to the
Directors’ Report. Discuss some situations which may require an adverse or qualified statement in respect
of the above
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CNO LODR (Code of Conduct) (M17R,N17M)
432.0
Pataka Limited is a listed Company in which no code of conduct is laid down for its board members and
senior members. As an auditor of Pataka Limited:
(i) Briefly explain the compliance requirements with respect to Code of Conduct as per
Listing Order Disclosure Requirement (LODR) Regulations.
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(ii) What will be your role in compliance of above-mentioned Code of Conduct as per LODR
Regulations?
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¾ Compliance requirements for code of conduct as per LODR–
(Responsibility of BOD & SM)
x The Board shall lay down a code of conduct for all Board members and senior
management of the listed entity.

(Incorporate Companies Act)

x The Code of Conduct shall suitably incorporate the duties of Independent
Directors as laid down in the Companies Act, 2013. *

(Posting on Website)
x The code of conduct shall be posted on the website of the company.

(Compliance)
x All Board members and senior management personnel shall affirm compliance
with the code on an annual basis.

(Declaration by CEO)
x The Annual Report of the company shall contain a declaration to this effect signed
by the CEO.
(Senior Management)
x For this purpose, the term “senior management” shall mean personnel of the
listed entity who are members of its core management team excluding Board of
Directors. Normally, this would comprise all members of management one level
below the executive directors, including all functional heads.
(Responsibility of Auditor)
x The auditor should ascertain whether the Board of Directors of the company has
laid down a Code of Conduct for all Board members and senior personnel of the
company and obtain a copy of the same. He should also verify whether all Board
members and senior management personnel have affirmed compliance with the
code on an annual basis and whether the code has been posted on company’s
website.
CNO Management Discussion and Analysis. (N13E, S17M, P17M, N17R)

433.0
Briefly explain the Content of Management Discussion and Analysis
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CNO LODR (Regulation 36) (M18M)

433.01
Mr. Suzain has been appointed as a director of CAC Ltd. As an auditor, you are required to state the
information to be provided to the shareholders of the company in accordance with Regulation 36 of the
Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,
2015.
LODR, 2015
¾ Disclosure of Information to the Shareholders relating to Director‛s Appointment –
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CNO Independent Director (N08E, P17M)
434.0
Elaborate under LODR,2015, who is an Independent Director.
Answer
Author’s Note
(Refer law notes)
CNO Independent Director (N18E, M19M, N19R)

434.01
Comment on the following in the light of certificate of compliance of conditions of Corporate Governance
to be issued for a listed company where the Board consists of 10 directors including a non -executive
director as its chairman and further:
(i) There were 5 meetings held during the year as follows:
01/04/2017, 01/06/2017, 01/09/2017, 03/01/2018, 25/03/2018.
(ii) There are 4 independent directors. One of them resigned on 25/05/2017. A new independent
director was appointed on 01/09/2017.
(iii) The Chairman of Audit Committee did not attend the Annual General meeting held on
14/09/2017.
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(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1
internal audit report commented on certain serious irregularities as regards electronic online
auction of scrap. The agenda of Audit Committee did not deliberate or take note of the issue.
(v) There is no women director.
Answer ¾ Compliance Certificate as per LODR
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CNO Obligations of Directors & Senior Management (M19E)

434.10
The Directors and senior management of a listed company of which you are the statutory auditor, want to
know their obligations under the SEBI Regulations in regard to Board or Non-Executive Directors. (Mention
any five)
Answer (Discloser of Shareholding by Non-Executive Directors)
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CNO Verification of composition of Board under Regulation 17 (M19E)

434.20
You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the board is
9. As an auditor, state the points to be considered in verification of composition of Board under Regulation
17 of The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
Answer ¾ Verification regarding Composition of Board [Regulation 17]

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AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

CNO Applicability (M17M) / (N18R)

435.0
Xcess Ltd., having two subsidiaries but did not have any holding company, is a company whose securities
are not listed on any stock exchange, whether in India or outside India.
The CEO of the Xcess Ltd says that since it is an unlisted company therefore consolidation of financial
statement is not applicable. Comment on the contention of the CEO.
OR
Where a company has one or more subsidiaries, it shall, in 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. Explain clearly with reference of relevant Sections of the Companies Act, 2013 and The
Companies (Accounts) Rules, 2014.

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CNO Temporary Holding ( AS & IND AS - (N19E)

436. 00 Combined)
R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock-in-trade”
in its financial statements since '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 Ltd. can be
excluded from the consolidation. As the Statutory Auditor of R Ltd, how would you deal when the
consolidated financial statements are to be drawn up in compliance with Ind AS?
Section 129(3) of the Companies Act, 2013
Companies (Accounts) Rules, 2014,
Accounting Standard 21
IND-AS 110
¾ Companies Act, 2013
"$%, M
Section 129(3) of the Companies Act ,2013
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x Refer author’s note of CNO 436.30 .
CNO Temporary Holding( AS) (M6E,M8E,M15E ,M16M,P17M,S17M, M18M,N18M,N18R)

436. 10
R Ltd owns 51% voting power in S Ltd It however, holds and discloses all the shares as Stock-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 Ltd can be excluded from the
consolidation As a Statutory Auditor, how would you deal?
OR
Moon Ltd. acquired 51% shares of Star Ltd. during the year ending 31-3-2017. During the financial year
2017-18 the 20% shares of Star Ltd. were sold by Moon Ltd. Moon Ltd. while preparing the financial
statements for the year ending 31-3-2017 and 31-3-2018 did not consider the financial statements of Star
Ltd. for consolidation. As a statutory auditor how would you deal with it?
OR
Ajanta Ltd. owns 51% voting power in Alora Ltd. It discloses all the shares as "Stock-in-trade" in its
accounts with a view to their subsequent disposal in the near future. Ajanta Ltd. represents that while
preparing Consolidated Financial Statements, Alora Ltd. can be excluded from the consolidation. As a
Statutory Auditor, how would you deal?
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Author’s Note
CNO Temporary Holding (IND AS) (M17E)

436. 20
Moon Ltd acquired 65% shares of Sun Ltd on 28th October 2016 On 25th April 2017 they sold 25% shares
of Sun Ltd While preparing consolidated financial statements for the year ended 31st March, 2017,
accountant of Moon Ltd did not consider financial statements of Sun Ltd for consolidation. Comment
IND-AS 110


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+Moon Ltd acquired 65% shares of Sun Ltd on 28th October 2016 On 25th April
2017 they sold 25% shares of Sun Ltd. On 31st of March control existed.
¾ * Ind AS 110 “Consolidated Financial Statements” "

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in accordance with Ind AS 110 ' Q !
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Author’s Note
x Answer of this question has been redrafted as per IND-AS
CNO Temporary Holding ( Investment Company) (N18E)

436.30
H its Financial Statements in accordance with 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 observed that the Company had invested 25 % in SI Ltd., 50% in S2 Ltd. and 60% in S3
Ltd. of the respective share capitals of the Investee Companies. When checking the investment schedule
of the Company, an issue cropped as to whether there would arise any need X to consolidate accounts of
any such investee companies with those of H Limited in accordance with section 129(3) of the Companies
Act, 2013 which contains no exclusion from consolidation. Analyse the issues involved and give your.
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Author’s Note
1.
#controversy
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3. The answer provided above is with reference to Investment company, for which exempotion given
under Ind AS.

CNO Control Over Composition of Board (M15E, S17M, P17M, N17R)
437.0
ALFA Ltd. holds the ownership of 10% of voting power and control over the composition of Board of
Directors of GAMA Ltd. While planning the statutory audit of ALFA Ltd., what factors would be considered
by you for audit of financial statements?
Answer ¾ Facts of the Case
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CNO Permanent Consolidation Adjustment (M11R, M13E, M14R, N15E, M16R, N16M, S17M,
438.0 P17M)
Write a short note on - Permanent Consolidated Adjustments
Answer ¾ Definition

C C only on the first
occasion or subsequent occasions in which there is a change in the shareholding of a particular
entity

C 5
1 goodwill or capital reserve
)
/

1 equity attributable to minority/ noncontrolling interests
¾ Pre-acquisition Reserves
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$) !
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of pre-acquisition reserves of the
components. Date(s) of investment

/
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between the parent and the minority interests/ non-controlling interests )!
$!
/ / $ %

C
subsequent acquisition of shares in the components, disposal of the

components in the subsequent years.
¾ Netting off of Goodwill & Capital Reserves
, ! %/
C +in the case of one
subsidiary, goodwill arises and in the case of another subsidiary a capital reserve arises.
!choose to net off these amounts to disclose a single amount
)

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+
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subsidiaries have been disclosed in the notes to the consolidated financial statements

'
< /$ I )!I !

CNO Current Consolidation Adjustment (M09E, M11R, M14R, M14E, M16R, S17M, P17M)
439.0
While doing the audit of consolidated Financial Statements, which current period consolidation
adjustments are to be taken into account?.
Answer ¾ Current Period Consolidation Adjustments
- C C
/

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%
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/ !
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(Stock Reserve) - unrealised intra-group profits on assets acquired/ transferred from/ to

other subsidiaries;

(Intra group balances) - / ) =

"$%, 6>
(Harmonising accounting policy)- C /

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=

(Subsequent Events)- adjustments to the financial statements (of the parent and the
components being consolidated) for recognized subsequent events or transactions that
occur between the balance sheet date and the date of the auditor’s report on the
consolidated financial statements of the group.

¾ There are two types of subsequent events:

The first type of subsequent events consists of events or transactions that provide additional
evidence about conditions that existed at the date of the financial statements, including the
estimates inherent in the process of preparing financial statements (i.e. adjusting events).
The second type of subsequent events consist of events that provide evidence about
conditions that did not exist at the date of the financial statements but arose subsequent to
that date (i.e. non-adjusting events).
¾ Events occurring after balance sheet date which do not require adjustments would not normally
require disclosure, although they may be of such significance that they may require a disclosure in
the report of approving authority in the case of accounting standards and in the financial statements
in case of Ind AS. For such events, the following shall be disclosed
The nature of the event; and
An estimate of its financial effect or a statement that such an estimate cannot be made
adjustments for the effects of significant transactions or other events that occur between
the date of the components balance sheet and not already recognised in its financial
statements and the date of 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 that of the parent;
(Foreign Component)- In case of a foreign component, adjustments to convert a
component’s audited financial statements prepared under the component’s local GAAP to
the GAAP under which the consolidated financial statements are prepared.
(Minority Interest) - determination of movement in equity attributable to the minorities
interest/noncontrolling interest since the date of acquisition of the subsidiary.
(Deferred Tax)- adjustments of deferred tax on account of temporary differences arising
out of elimination of profit and losses resulting from intragroup transactions and
undistributed profits of the component in case of consolidated financial statements
prepared under Ind AS.
CNO Harmonising Accounting Policies (M18E)

439.01
H Co. Ltd. is a holding company with two subsidiaries R Co. Ltd., and S Co. Ltd., The H Co. Ltd., adopts
straight line method of depreciation for its assets whereas S Co. Ltd., follows written down value or
diminishing value method. Though R Co. Ltd., follows straight line method of depreciation, it does not give
effect to component accounting of depreciation in respect of high value assets. While consolidating the
financials of the R Co. Ltd., and S Co. Ltd., with those of H Co. Ltd., determine the possible issues that you
have to ensure for compliance in the light of above facts
Answer ¾ When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework is Different than that of the Parent:
.
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Case Discussion
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CNO Responsibility of Parent (N12E, M16M, S17M, P17M, N17M, N18M)

440.0
Briefly explain the responsibility of holding company for preparation of Consolidated Financial
Statements.
Answer ¾ ) !

+/
/+ /
5
identifying components+
) /
complete financial information from components=

GAAP conversion, where applicable.
harmonization of accounting policies and accounting framework; and.
including the financial information
)

=
%/ consolidation adjustments.
+ !/reportable segments/ /=
!/related parties and related party transactions /=

¾ Instructions to Component
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CNO Objective, as an Auditor, in the audit of (M18E, N19R)

440.05 Consolidated Financial Statement
Deluxe Ltd. holds the ownership of 51% of voting power and control over Executive Ltd. Holding company
have prepared the consolidated financial statement as required by Sec. 129 of the Companies Act, 2013.
What will be your objective, as an Auditor, in the audit of such Consolidated Financial Statement?
Section 129 (4) of the Companies Act, 2013
"$%, 6L
¾ Objective of the Auditor in the audit of Consolidated Financial Statements
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CNO Relevance of SA 600 (N15E, N17R, N18E)

442.0
Describe the relevance of SA 600 while auditing consolidation of Financial Statements
OR
What is meant by “Group financial statements”? Give reference of relevant Auditing Standard and issues
addressed concerning the audit of Group financial statements.
OR
What is meant by “Group financial statements”? Give reference of relevant Auditing Standard and issues
addressed concerning the audit of Group financial statements.
.L77FA/ %. . G


¾ SA 600 and its relevance –
. /SA) 600, ‘Using the Work of Another Auditor’ establishes standards when
an auditor, reporting on the financial statements of an entity / B

+uses the work of another auditor on the financial information
of one or more components included in the financial statements of the entity.
The principal auditor, if he decides to use the work of another auditor in relation to the audit of
consolidated financial statements, should comply with the requirements of SA 600.
¾ Determination of materiality during the audit of consolidated financial statements
,
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audit report of Consolidated financial statement only if material for
the group
Author’s Note
# Mistake point
IMPORTANT – Recent Change in answer.
Last para of the answer has changed recently. Earlier in the answer provided by the institute, it was
mentioned that while considering the observations of the component auditor in his report on the
standalone financial statements, the concept of materiality would “not “be considered.
However, this was inconsistent with SA 600
requires to consider the concept of materiality while
giving observations in audit report of Consolidated financial statement.
The impact of including the word “not” was that,the component auditor’s observation was mandatory to
be included in audit report of Consolidated financial statement irrespective of whether the component
was material or not.
Such inconsistency has been removed after removal of the word “not”.

CNO Reporting (M17R, M18R, M18M, N18M,M17E)
443.0
You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier to the UK
building and construction market. With a turnover of 2.9 billion, the company 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?
(b) When the Parent’s Auditor is not the Auditor of all its Components?
(c) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework
Different than that of the Parent?
(d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of the
Parent?
(e) Where the financial statements of one or more components is not audited
OR
C Ltd is holding 55% shares of D Ltd M/s AB & Associates are statutory auditors of C Ltd whereas for D Ltd
there is another firm appointed as statutory auditors What are the reporting responsibilities of M/s AB &
Associates for audit of consolidated financial statements?
Answer (a) Parents Auditor ( / +
<
= Auditor of all
<
/

Components
,
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(b) Parents The auditor of the CFS should consider the requirement of SA 600.
Auditor not As per SA 706-
Same as

! %

component
+ I -2

auditor
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This may be done by stating in aggregate:
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%
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different from
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CNO (Losses in Subsidiary) AS 21 (M09R, M13E, M16M, S17M, P17M)
444.0
K Ltd. had 5 subsidiaries as at 31st March 2015 and the investments in-subsidiaries are considered as long
term and valued at cost. Two of the subsidiaries net worth eroded as at 31st March 15 and the prospects
of their recovery are very bleak and the other three subsidiaries are doing exceptionally well. The company
did not provide for the decline in the value of investments in two subsidiaries because the overall
investment portfolio in subsidiaries did not suffer any decline' as the other three subsidiaries are doing
exceptionally well. Comment.
. 8.
/,$

Part II -- Requirements of Relevant Standards & law Consolidated
¾ . . 8F.
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CNO Equity Method (N13E, N15R, P17M)

446.0
H Limited, a company registered with SEBI, has three subsidiaries and one associate. While doing the audit
of Consolidated Financial Statements (CFS) of H Limited you have come to know from its notes to accounts
that the associate entity had proposed dividend. H Limited computed its share of the results of operations
of the associate after taking into account the proposed dividend. Comment
. 68.
/,$ .

-

Part II -- Requirements of Relevant Standards & law
¾ As per AS 23 on “Accounting for Investments in Associates in Consolidated Financial
Statements”, A ! + $ !

+ !/!
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!/ $
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//
¾ Explanation
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$
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2 ' +
C
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)
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/ $ $
)

,

$ $
+
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*

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%/
$
+ )!*

Author’s Note
IND AS 27 deals with equity method of Accounting for associate .

"$%, 8
BANKS AUDIT
CNO Principal Enactments (N04E, N09R, N12M, M14R, P17M)

447.0
Write a short note on - Principal Enactments Governing Bank Audit.
Answer ) /%/$/
/)%,

/$
/$ ! )%5
(Below acts are arranged in ascending sequence of years for memorisation)

x #$0%,.

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+
677:
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A %/.
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(16 Banks were Nationalised)
x #/#0%.
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A %/.
+PM7
(6 Banks were Nationalised)

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Authors Note –
Acts are rearranged in ascending order of years so that it is easy to remember
CNO Peculiarities which may necessitate special audit consideration (M19E)

447.001
Banks, because of certain characteristics, are distinguished from other commercial enterprises and hence
it needs special audit consideration. As an auditor of a bank, specify the various peculiarities which may
necessitate special audit consideration to be taken care by you.
Answer ¾ Special audit considerations arise in the audit of banks because of:

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CNO NPA (Classification of Assets) (M11E, N16M, P17M)
447.01
“An asset, including a leased asset, becomes non-performing when it ceases to generate income for the
Bank.” Define the criteria for classification of non-performing assets.
OR
In the course of audit of "Sabka Bank‟, your firm observed that the bank has classified some of the assets
as non-performing assets (NPA), for example, bills receivables for remaining overdue more than 30 days,
loans for remaining overdue for more than 60 days etc. Please guide the accountant with regard to criteria
to be adopted for classifying an asset as NPA.
Answer NON-PERFORMING ASSETS
. +
/ +)
/
/

)%
/
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T-C2ABS
¾ Term Loans:. / ". <

$ P7!

¾ Cash Credits and Overdrafts:.

$
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¾ Credit Card Accounts:-

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¾ Agricultural Advances: . /
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¾ Bills Purchased and Discounted:0

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$ P7!

¾ Securitisation: ) ". !

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"$%, 88
CNO (Exceptions) NPA (M05E, M16E, P17M)
449.0
Exceptions to the General Rule of treating advances as Nonperforming Assets.
Answer Exceptions to the General Rule of treating advances as Non-performing Assets:
¾ Asset Classification to be Borrower-wise not Facility-wise: .
/ )
$
)! )$ ) ".<",

$ <
!
!
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¾ Erosion in Value of Securities/ Frauds Committed by Borrowers: ,

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+ )
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+ '

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¾ Advances under Consortium: - $

)) record of recovery of
the respective individual member banks and other aspects having a bearing on the recoverability
of the advances.(
)! )
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$/
/
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) $

)%
))% +".

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+ + / /
$!
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)%

$!+

$)%
¾ Temporary Deficiencies: ,

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+
)%$ //5
0% / %/

$ )!

!
1/ )$ )

% However, considering the difficulties of large borrowers, stock statements
relied upon by the banks for determining drawing power should not be older than three
months
/
)/

%
/.
A working capital borrowing account will become NPA if such irregular drawings are
permitted in the account for a continuous period of 90 days even though the unit may be
working, or the borrower's financial position is satisfactory.

/<

$ )$< M7
! <

+
) ".

¾ Agricultural Advances Affected by Natural Calamities: -
)! #0,
) !

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0% !
+ $J+
$

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+ )C
/
#0, ‟s latest Master Circular on Prudential
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¾ Regularisation Near About Balance Sheet:

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¾ Government Guaranteed Advances

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¾ Advances Against Term Deposits, NSCs, KVPs/ IVPs, etc.: .$
/ 1 +
" -/)+H9<,9
) ".+ $
/$)

¾ Advances to Staff: , )/ $
)% )

$
)% ,
/ $
/
) !)
$!
+ )

$
<$
)
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$
$
)!)% ! )% )

)X ‟ under the schedule of Other Assets.
CNO NPA (Classification of Assets Pressure by Bank Manager) (N18M)

449.01
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.
Answer Part I -- Relevant Laws

-
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".
0%/
Part II -- Requirements of Relevant Laws
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CNO (Agriculture Advance) NPA (M14E,P17M,M19E)

450.0
Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March 2015.
In the audit planning, the partner of Shy & Co. observed that the allotted branches are predominantly
based in rural areas and major portion of the advances were for agricultural purpose. He needs your
assistance in incorporating the criteria prescribed for determination of NPA norms in respect of
agricultural advance, in audit plan.
Answer ¾ Criteria for determination of NPA norms in respect of agricultural advances:
./
) ".+if the instalment of principal
or interest thereon remains overdue for two crop seasons
./ /
) ".+if the instalment of principal
or interest thereon remains overdue for one crop season.
¾ As per the guidelines, the following points are to be considered:
long duration” crops would be crops with crop season longer than one year.

crops, which are not “long duration” crops would be treated as “short duration” crops

+
means the period up to harvesting of the crops
raised, would be as determined by the State Level Bankers Committee in each State.
1 /
)! /
+ )$ ".
)
) /
$)!

The above norms should be made applicable to all direct agricultural advances as listed in
the Master Circular on Lending to Priority Sectors.,
/
+

". ) ) /
$
+

+At present, is the 90 days delinquency norm.

,
!/

! /
)+ banks may
decide on their own as a relief measure conversion of the short-term production loaninto
a term loan or re-schedulement of the repayment period; and the sanctioning of fresh
short-term loan, subject to guidelines issued by RBI.
CNO (Consortium)NPA (N12M, M13R,P17M, N17R, M18M,N08R, N11R,

451.0 S17M)
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows
financial year as accounting year. The bank is a 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 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 account of X Ltd as performing. Advise your views on the issue
which were brought to your notice by your Audit Manager.
OR
The bank is a 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 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 account of X Ltd as performing.
. -
"# ".
"$%, 8L
¾ +several banks form a group (the 'consortium') under the leadership of a 'lead bank' to
make advance to a large customer on same conditions and security with proportionate rights. In
such cases, each bank may classify the advance given by it according to its own experience of
recovery and other factors.
¾ )%
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CNO Sale of NPA (M15E, M18E)

455.0
During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of NPAs.
Please help them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.
Answer ¾ ,
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CNO (Income, Theory) Advances (N10E, N13R, P17M, M19R, S17M , N19E)
458.0
What is the income recognised in the case of ‘non-performing’ assets of bank?
Answer ¾ 0%
/

+
accrual basis++
,

should not be unreasonable to expect its
ultimate collection,$ /

!//

/
/ + / )%
/

/
!(

!

/ +

/ $!
))$ $

PL (please) don‛t GRIFT

On Partial Recoveries in NPAs:
, )

/ ) )% )

$".+
+)%
required to exercise the right of appropriation of recoveries in a uniform and consistent
manner and adopt an accounting policy as per appropriations
!
)
/
. P
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/! $<

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)

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$
not out of fresh / additional

credit facilities sanctioned to the borrowers concerned.

On Leased Assets

/

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/+/+)$ $

/ , $)%

$

Government Guaranteed
If Government guaranteed advances become NPA, the interest on such advances should
not be taken to income account unless the interest has been realised.

Reversal of Income
,!$
+
/)

+)
".

!!+

+

)$ $ This will apply to Government
guaranteed accounts also.
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.
2 +
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).

Secured by FD / NSC / IVP / KVP / LIP

,
$
/ +" -+,9+H9
may
be taken to income account on the due date, provided adequate margin is available in the
accounts.
"$%, 8M

Fees / Commission on Renegotiation / Rescheduling

2
)! )% /
/
/ ) should be recognised on an accrual basis over the period of time
covered by the re-negotiated or rescheduled extension of credit.

On Take-out Finance
,
%
+)

$!+

)!
/ )% ".+ not recognise income unless realised from the
borrower/taking-over institution / $
CNO (Income, CASE) Advances (M13E, 17S, 17P, M18M, M19M, N19R)
458.01
In course of audit of Good Samaritan Bank as at 31st March 15 you observed the following:
In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA
norms as well as income recognition norms to this particular account. When queried the bank
management replied that this account was guaranteed by the 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 by a State Government ?
-
4$ 4 .$

¾ ,/$ / $
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+

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CNO Investment (Income, Mutual Fund) (N11R, N12M, N16R, P17M, S17M, N18R,
458.02 N18M)
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows
financial year as accounting year. State your views on the following issues which were brought to your
notice by your Audit Manager:
The bank has recognised on accrual basis income from dividends on securities and Units of Mutual Funds
held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were
declared after the end of financial year.
Answer ¾ It is not a prudent practice to treat dividend
)

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+ +
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CNO (Multiple Cases) Advances (M16R)

459.0
As a branch auditor of a Nationalised bank, how would you classify the following advances based on
securities?
(i) Advances covered by ECGC/DISGC guarantees.
(ii) An account which is fully secured but the margin in which is lower than that stipulated by the bank.
(iii) Advances covered against cheques purchased including self-cheques.
(iv) Advances against supply bill.
Answer ¾ .$
)
' $
! )

,! $

$)! $
!
)
+ ! )

= / )

¾ " ) ".

)
9 A
1 /

$
$> ' )5
(i) .$

$ )! &-4- , 77 / L7O+ L7 )
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$ )! )% < /$ /
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2 # :
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$&-4-<1,-4-
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(ii) .

!
_ # 77 `
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!

$
(iii) .$

$ / _#77`-! -_#

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+

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!
(iv) .$
/ !) _#77` !0_#:7`(#77
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CNO (Audit)Advances (N8E, M11R, N12R, N14R, N16R, M16R, P17M,
462.0 M18E, M19R)
As the concurrent auditor of Nagpur Main Branch of XYZ Bank Ltd. state the issues
which have to be considered in the audit of advances.
Answer ¾ Audit of Advances of a Bank:

)
$
$
)%
& $

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9!

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Authors Note
Question w.r.t Audit of Advances, ICS over advances and LFAR report over advances have similar points
So we have created a combined common answer and have arranged it in a logical sequence .
However original text has also been kept. Students can also read that if they want.
For common answer see after CNO 466.0
CNO Advances (LFAR) (N11E, N13R, P17M)

464.0
As a bank branch auditor, what aspects will be considered while reporting on credit appraisal, sanctioning
/disbursement and documentation in respect of advances in the LFAR?
Answer ¾ Verification of Advances in the Long Form Audit Report (LFAR):

$

/2. #
)%($ /

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+

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+'
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+ /
+
+
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+
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' )
/

$ /

/

$ / /
$

Authors Note
Question w.r.t Audit of Advances, ICS over advances and LFAR report over advances have similar points
So we have created a combined common answer and have arranged it in a logical sequence .
However original text has also been kept .Students can also read that if they want.
CNO Advances (ICS) (M18R)

465.0
Advances generally constitute the major part of the assets of the bank. There are substantial number of
borrowers to whom variety of advances are granted. The audit of advances requires the major attention
from the auditors.
As an expert in bank audit, you are required to briefly discuss the area of focus and suggested audit
procedures regarding evaluation of internal controls over advances, substantive audit procedures and
recoverability of advances
Answer ¾
)
$
) $
)! !
$
/ $
+)!5
'/loan documentation;
'/ validity of the recorded amounts;(Subsidiary ledgers / Controls Accounts /
Confirmations)
$/ operation of the accounts=
'/ existence, enforceability and valuation of the security;

%/compliance with RBI norms including appropriate classification and provisioning=

!/ appropriate analytical procedures.
"$%, >
x . )% !supported by Loan documents and
other documents
) $
(E.g. Partnership Deed,
NOC of all partners, project report, income tax returns, application forms etc.)
x no unrecorded advances. (Like finance lease, of balance sheet financing
or shown as investments)
x .$
amount due to the bank.(in consortium, take out finance,
restructuring, rescheduling etc)
x .
)

$
outstanding at the
date of the balance sheet.(Match balance in balance sheet to advance schedule
which is matched to subsidiary ledgers and control accounts, loan should not be
time barred
x $
disclosed, classified and described

/
/

$ !
/ ! (Secured, Unsecured etc.)
x Appropriate provisions towards advances have been made #0,+
.
/ /!

/

)valuation of advances is appropriate ! +

$) !$

/ $
(Appropriateness, NPA classification and provisioning)
¾ !$ /
$) !$
5

) )! )
/ '

)
#

!
. ‟ reports in the case of borrowerC!////
#7%
)$%/
)%/!
Authors Note
Question w.r.t Audit of Advances , ICS over advances and LFAR report over advances have similar points
.So we have created a combined common answer and have arranged it in a logical sequence .

CNO (ICS, Draft Policy) Advances (M12E, N15R, P17M)
466.0
As the concurrent auditor of Z Bank Ltd., you are requested by its management to draft an internal control
policy in respect of loans and advances. What factors do you consider as important while drafting such a
policy?
Answer ¾ '

!$
$$

+ / ' ) $
, /+
$
$

+ + /5
)%%$
! !/ credit worthiness
) ) /sanction )%

$

!+/ /+ )/+

!+/ )% + + !
, )

! )%
/ !#0,

' % /
. necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.))'
)! )$

Sufficient margin

)% /
%

$!
$ $) !
/
) / $
compliance with the terms of sanction and end use of funds )
(Maintenance of Stock, Regular Reporting, Permission for new loan)
"$%, >6
, securities % +) +
+
) )%
$

)

. securities requiring registration ) / )%

)!

/$ )%
,
goods in the possession of the bank,

%/)

%
/) !
)! )

)

+
)%
Surprise checks should be made in respect of hypothecated goods !

)%
.!increase or decrease takes place in the securities or their value, proper
entries should be made in the Drawing Power Book and Daily Balance Book
)

%)!

accounts should be kept within both the drawing power and the sanctioned limit.
.

exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority /!
operation of each advance account should be reviewed at least once a year+
$
/$

Authors Note
¾ Question w.r.t Audit of Advances , ICS over advances and LFAR report over advances have similar
points .So we have created a combined common answer and have arranged it in a logical sequence
¾ For common answer see after CNO 466.0
CNO 462 ,464 Combined Answer. See the relevant CNO

,465,466
Combined Audit Procedures + Internal Controls + LFAR (Advances)
Answer ¾ Appropriate Procedures(E.g. For Home Loan :- Loan Application---Processing Fees Deposit---
Verification of Application---Evaluation of Repayment Capacity---Sanction---Offer letter---
Acceptance---Verification of property---Disbursal of loan)ÆWell designed forms

Æ Documents (Application, ID Proof, Addressee Proof, IT Return, Agreement,
Security Documents etc)ÆCredit WorthinessÆExistence, enforceability and valuation of the
security=Æ Ownership ) )%
)
)%Æ
/test check at the time of receiptÆfrequent inspection)! )

ÆSurprise checks)
!
/ÆAs soon as any
increase or decrease %

$+ )
1/0%1!0
0%ÆSufficient marginÆAuthorisationÆ

) % ) drawing power and the sanctioned limit Æ

Compliance with the terms of sanction). (Maintenance
of Stock, Regular Reporting, Permission for new loan)ÆNo advance should be omitted.(Like
finance lease, of balance sheet financing or shown as investments)Æ Amount should
represent amount due to bank(in consortium, take out finance, restructuring, rescheduling
etc)Æ Amounts included in balance sheet
$
/
)
(Match balance in balance sheet to advance schedule which is matched
to subsidiary ledgers and control accounts, loan should not be time barred)Æ Reviewing the
operation of the accounts=Æ NPA ClassificationÆ Adequacy of provisionÆ Secured /
Unsecured PresentationÆ
!/ appropriate analytical procedures.

CNO Advances (Dot Com) (N8R, M11R, N14R, M16M, N 17M, 17P, N17M,
467.0 N18M)
As a branch auditor of a nationalised bank, how would you verify the following?
Advances to DOT COM Companies.
"$%, >8
Answer ¾ Advances to DOT COM Companies
Business Plan & Revenue Model

9! )
!
! $

9!
! ! /

/

Internal Control to Check Credit Worthiness & Sanctions

&$

!
! /
$

! !/
)
) /
)%

$

!+ / /+ )/+

!+/ )% + + ! +
.

!
+ e.g., agreements, demand promissory notes, letters of
hypothecation, etc$)'
)! )$

Loan Documents Relevant for Company
&'

)+
)
+
Security in the form of Mortgage
&'

! //+ //

&/ //
//
& )
//+ $
/
/ #/ -
Legal Enforceability of Security
9! $

! /!

)+ i.e., whether the necessary legal formalities regarding documentation,
registration, etc.+$)
=
!
$

)%= ' $
!+
!+
$
/ $

Periodic Statements
#$
+
+
+

$) !$

Unusual Activities
#$ $

/!'

=

)

/ / =
//

=
)! /

$ !// $
!+

Healthy Turnover & Trends
&' ! $
, )

!

$ ) ) .!

)
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! +
) ' I '

$
)
/

C

! ! ! ) % ! !
/

Provisioning Norms
& $/ $ ) $ )$

+
/ ! ! +
!
"$%, >>
Authors Note
x Remember in following Sequence of how loans are processed, in the same flow auditor should do
his checking
o 2 )% 03#$
o !, -

%
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o
)
o
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$
o -
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!
o )

o -
%
$
o * ! $3
o / $/
CNO Advances (Goods) (M08E, 17P, N18R)

469.0
As a Statutory Auditor, how would you verify advances against Goods?
Answer ¾ Verification of Advances against goods:
Hypothecated Goods
x Register & Scrutiny System: - . $! 0%!

/ / !
!

%<)%) )! )
x Letter of Hypothecation: - !
)')!
, $ //
!
+ )%I
!! ' .
x Certification of Registration of Charge: - ,
)
!+
'

/
/ /
!
#/ - , !)

//+/
/
!
x Statement from Borrower: - ,
!
/+

% !$/!

$ )*' )
$
Pledged Goods
x Statement from borrower: - ,
/ / )%+

%
$ ) //
! $ / / )! *

% /
/ $ /
x Movement of Goods: - !' %!$ /
$! $ /<
x Outstanding Delivery: - , ! / $! /
/ )
+ )

!
/ $ /
/
!.
Goods with Third Party
x Third Parties: - +/ +

/// + +)%+% +

x Undertaking: -, $/$ %/ )% !
$ /
)% !+ + ! $
N N )% $
/
/)

.
"$%, >:
x Confirmation Certificates: - ,

+

)) )!
)%
// )

$
/)

%)!
CNO Advances (LIP) (17P)

470.0
The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write suitable
audit program to verify these advances.
Answer ¾ Verification of Advances against Life Insurance Policies is as under-
. / $
$
/

$
/5
inspect the policies !/ )%
such assignment has been registered with the insurer.
examine whether premium has been paid on the policies
!

Certificate regarding surrender value obtained )'

!
surrender value is subject to payment of
certain premium, the amount of such premium has been deducted from the surrender
value
CNO Drawing Power (M19E)

470.10
Drawing power calculation from stock statements in respect of working capital accounts. What may be
your areas of concern as regards matters specified above?
Answer ¾ DRAWING POWER CALCULATION
Drawing Power & Sanctioned Limit
x .
)kept within both the drawing power and the sanctioned limit

'

/
/ $
/)brought to the notice
of the Management/Head Office regularly.
x Sanction Limit = 1/5th of Last Year Turnover or (75% of LY Stock – Creditor + 60% of LY
Debtor) whichever is lower
Drawing Limit = (75% of Actual Stock – Actual Creditor) + 60% Actual Debtor
Stock Statements / Annual Report / Policy

% + ! ) )! )
)%)
J .# ) )!
))
J !The monthly stock statement of the month for
which the audited accounts are prepared and submitted should be compared and the
reasons for deviations, if any, should be ascertained. It needs to be ensured that the
drawing power is calculated as per the extant (Existing) guidelines formulated by the
Board of Directors of the respective bank and agreed upon by the concerned statutory
auditors (Outdated it should be simply as per sanction letter). Special consideration should
be given to proper reporting of sundry creditors for the purposes of calculating drawing
power.
Irregular Account
0% / %/

covered by the

adequacy of the current assets.1/ )$ )

% However, considering the difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing power should not be older
than three months. /
) /

% /,
F/G

P7!+
)

".+$ /

/!

"$%, >L
Stock Audit
The stock audit should be carried out by the bank for all accounts having funded exposure
of more than Rs 5 crores. .
$
%

0
)
% )%

0%
%/

) )!
% )$/

) /$
)!
% $
!

/ The drawing power needs to be calculated carefully in case
of working capital advances to companies engaged in construction business.$
% /)
It also needs to be
ensured that mobilization advance being received by the contractors is reduced while
calculating drawing power.(Generally, 15% of total project cost)
CNO Credit Card (ICS) (M04E, N09E, M15R, P17M,N19E)

473.0
How will you evaluate the Internal Control system in the area of Credit Card operations of a Bank?
Answer ¾ Credit Card Operations

Storage
)

$ /

Screening Before Issue
)
$
/
)! /

Available Card Limit
) ! )!

)%)
/

)
'

/

Settlement Confirmation
)! /)!

)! /

Reimbursement
#)
) ! $
$ !

I

Charge to Customer
. ) /
) !
/

I

Statements
)! /! !

Monitoring
)!
‟ payments.
x )!
$

‟ accounts.
)+
!)$+
!$

) $/

x , $)!) )

! - ) )! /
/

) +! )+ $
.
Authors Note
Points are rearranged for ease of understanding and memorising
CNO TT & DD (N13E, M16M 17P, M18M, N18R)

474.0
Your firm has been appointed as an auditor of a nationalised bank. You allocated the task of verifying
Telegraphic Transfers and Demand Draft to your Audit Assistant. While verifying, the Audit Assistant
"$%, >
informed you that there are a lot of irregularities in Telegraphic Transfers and Demand Drafts. What
guidance would you give him?
Answer ¾ Telegraphic Transfers and Demand Drafts
Secret Codes for TT

)% $ ) $
% ! )

)
+
/
/ /)!)!

Signature Matching for DD
/ )

%)!
/ 0%
Advice after Issue (Intimation)
. 11)!)
) !
)! $

)

Discrepancy
, !/ )

$
! 11
/ )

$

)
+ %

Authors Note
Points are rearranged for ease of understanding and memorising
.
CNO SLR (17S, 17P, N17M, M17R, M18M)
475.0
You have been appointed as a statutory central auditor of APNA Bank, a Nationalized bank. What special
points would be borne in mind while conducting the audit of compliance with "Statutory Liquidity Ratio"
(SLR) requirements?
Answer ¾ Statutory Liquidity Ratio (SLR) Requirements –
#$0%, !
)% $!

# of 12 odd dates in different months of a financial year not being Fridays. The
resultant report is to be sent to the top management of the bank and to the Reserve Bank. The
report of the statutory auditors in relation to compliance with SLR requirements has to cover two
aspects:
correctness of the compilation of DTL (Demand and Time Liabilities) position; and
maintenance of liquid assets.
¾ Audit approach and procedure:
) / $

#0,+
!//
composition of items of DTL.
# branch auditors to send their weekly trial balance2!

0
+ 1
$! /2! !
)

$!

)
relevant to the dates selected by him
)
)

! '
)

)

#$ $ returns received from un-audited branches !!)$

&'+on a test basis, the consolidations regarding DTL position prepared by the bank
with reference to the related returns received from branches. '
$
)! )%

/

))! #0,
('/
1+

!' / $
)excluded from liabilities-
RIL-M)
x R
$ )
)
)
)
$!(Recovery of Bad Debts is not a liability)
x .
$ I

! / ) !
/
(Such money is not returnable hence not
liability)
"$%, >M
x AC <)
!/ L% )
/
! ) %
$ + +
!+
+

<) ' ! )! )
)
C )! %)
(Link branch of bank deals with RBI and other Banks,
if money is received by such branches but not yet used or adjusted)
x M/% !
(Money deposited in
bank before giving loan)
x !+

! ' / $ ) included in
liabilities –
o Net credit balance in branch adjustment accounts
/ /
/)

o Interest on deposit as at the end of the half year$ )//
' !
o 0/ ) )! )% , )

Q) I + )
/$%
Q) )%/ ! ,I+
)
/ Q )%/ ! ,I +
$ )
" .
)

Q) I
o

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" .

)
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! !J
!

$)
<

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<! )

$
/ !)

)%
&'
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$

)

, !) +$ /
!)+

)% !
$ + '

)

)%

1

$ !
)$ $

)% (

+

!
)

% $
)! )%
investments to verify
the amount of approved securities held by the bank on the dates selected by him Examine
whether the valuation of approved securities has been done by the bank is in accordance
with the guidelines prescribed by the RBI.
x ( /

# +
!
number of unaudited branches

$ )
/

CNO Drafts paid without Advice (M8R, 17P)
476.0
Describe the procedure for verification of the following balances appearing in the account books of a bank:
Drafts paid without advice
Answer ¾ Drafts Paid Without Advice:
)

!

)! )

)
$ $
)

$ )
$, + + ' !

/ )%
/
! )
! / /5
! $!/
! )!

/
// !

=
!
/ $
) !
$=
"$%, >P
! /$

$ )

/

)
/
) $

!/ / $! /

$)) !

$ $
, )
$
!
!
%

/
/

CNO Inter Branch Adjustment (M10E, M12R, N13R, P17M)

477.0
Describe the procedure for verification of the following balances appearing in the account books of a bank:
Branch adjustment account.
Answer ¾ Branch Adjustment Account:
, )
)%+ )

) )

)
!

/

! )!

/
$

+ + /

$
5
)

!

-
%C
C !

)!
!$
$ !
9! $ ! '
$

CNO Concurrent Audit (P17M)

478.00
Discuss the concurrent audit system in commercial banks.
Answer ¾ -
'

) , $ )

' )! $$

$) $

%/%!

%/
! /
/ )
/

$
/ $/

.

!
C/
%)!)
/
)!

*$+
!$

! )! *
+ ! $

!
#0,+ ! / !
, $! / )
+
$ $ /

$ +

/ )
// )
$

¾ Coverage
1 <1$ *
/ !
$J
$ + /
/ )% )/ ) rediscount and
/'
/) ))C

, +)

+ %/
)/$ ))C

$/)

$5
x 0

%' ///
:7O
%' )%=
x 0
///
$ :7O ///
0%

$
+ // )
!)
/

%'

/'
$
:7O
$/ , )
/// :7O 0%I
"$%, :7
+ )

/ !)
$
:7O
$/ )

(
!/ )$ +
!
$/

5
x '
!/)

x $!//)

x
)
//'
/)+
)%/)+
/
)%/)'/
x / ))
<$!
x *
/ !< / /
$
x ! )
0%

)
x 0
)C

! )

$<

¾ Types of activities to be covered

)%
!/

%
$

)/
$

% /
+ +
!
+ $ + $ )+
'

! + !
+ )

+
/
+/'
/)
/"
+
)
%
/ + !

)

)
!!
0%)! 0%I,
. 1

0%I. - 01
.-0
, /
+
)/$

%//%

$//

$$/
(

!) $)!
.-0

CNO Concurrent Audit(Scope) (N6E, M9R, S17M, P17M)
478.01
Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India guidelines
Answer ¾ Scope of Concurrent Audit

)
!!
0%)! 0%,
. 1

0%. - 01
.-0
, /
+
)/$

%//%

$//

$$/ .
(

!) $)!
.-0
2 , the guidelines issued by the RBI cover %!
$ )

)% $ . 0!
+ /
$)! /:
"$%, :
CNO Verification of Balances (Foreign Country) (N8R,M11R,N14R,M16M,N17M,N17R,

479.0 P17M,N18M)
NAYASA Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2016-17. Being head-in-charge of the assignment, while planning, you distributed the work among your
team members and assigned Mr. Hary for verification of Balances in account of the bank situated in foreign
country. However, Mr. Hary, being fresh to the bank audits, needs your guidance. Kindly guide.
OR
As an auditor of a nationalised bank, how would you verify the following?
Balances in account of a bank situated in a foreign country.
Answer ¾ Balances in Account of a Bank situated in a Foreign Country: /
!)
$!/)

)% /

!
9! / )

)%

!

#$

!
/
x &' )
/
/

/ $) % $ !$) %
)
!)$ )

+
+

+
!

x &'

$
/ / .

$ /)%+!

!
!
/ /!
x &' ) /

/

/ $)
) !

&' /

)%
+
! !+

$) //

-
% /

)

) )%
/

-
% )

$ ,

! '
/
$/ )

$ .
/
.
CNO Foreign Exchange Transaction (N18E, N19E)

479.01
You are the Concurrent Auditor of a Branch of Nationalized Bank which deals in foreign exchange
transactions. Give focus areas of your checking in this respect.
Answer ¾ Focus Areas in case of Foreign Exchange Transactions:
-
%/)/

-
% 2-"#
)

)
-
% <
$) !

"$%, :6
&''

/

!& !! J
!
/$)
$
& )
"
/

))! )%
& $)/ <$

)
/ /'
/
&
/ )! #0,<* )% ) /

&$
<

" 9

<)

CNO Vostro / Nostro (M05E, N11R, P17M)

480.0
Write a short note on - Vostro and Nostro Accounts.
Answer ¾ Vostro and Nostro Accounts:
0%I
% /

0% .

$)
<

/

!
)!,

)% $
/ )! F" .
G
2' +)%,) /A 1.
"
g%
<)
<
+

)/ )! ,

" .

F9 .
G "
*/)%

!

%, ,)
<
<
)%

,# .
/ 9 .

2 ' + 4 0% / 9 .

,0%
('/
/'
/+ !

" .

$

"

%/

! )%
$

)

A

" .
+ ' + !

$ J ! /

!
+ J

+ J)

$

/ <
/ < / ) !
+

+) ! + )%

$!

)
)%

9
,

)

$ )
$ ) $ )

+

)
$ ) +

9
.

CNO Nostro (Verification of Nostro Account) (N18E)
480.01
Your firm has been appointed as Statutory Branch auditor of a Nationalised Bank for the financial year
2017 - 18 which is dealing in Nostro accounts. Enumerate the audit procedures you will follow for
verification of Nostro accounts .
Answer ¾ Audit Procedures for verification of Nostro Accounts:
Meaning of Nostro Account
0%I
% /

0% .

$)
<

/

!
)!,

)% $
/ )! F" .
G

Audit Procedure
('/
/'
/+ !
5
x &$ , -
"$%, :8
$
/ <
/< /) !
+

+) ! )%

x #

" ,"#)%,)%

"
" .
)

J
! !J
!

$)
<
)%$

<! ) $

/ !) )%
x A

,
A

"
+' !$ J !

/

!
+ J J

)

x / $)
" /

!
0/))!)%, )
Q)
I + )
/ $% Q)
)%/ ! ,I+
) / Q
)%/ ! ,I + $ )
"
.
)

Q) I

CNO AEO (M07E, M13M, P17M)
481.0
How would you verify “Acceptances, Endorsements and other obligations” appearing in the Balance Sheet
of a bank?
Answer ¾ Acceptances, Endorsements and Other Obligations: $
!

$

$
!-

/ $! )

/ )! )%/

! !' /

!) /

)$
Acceptances, Endorsements and Other Obligations:
/)

)! )%)

))! )%I

<)! )%

5&$
!
$-2e.g. custody,
maintenance of records, periodical verification, reconciliation etc.
9! )
- #/ )! )%

- !
&' /
+
-3
!)
/-
.
¾ Other Acceptances and Endorsements: ! / )!
)%
*

% ) /
)! )%
) '
)%
/ ! !
,

+ ' )%

)/
,

!
)/
)%+
/ ) ! )

,

/
!) 5
&' / )! )%

% ) / )! )%
9!
)% / ! !

5(
$)+$! )%

)/
,)/ )

+ )
/ ) !
0
.

"$%, :>
CNO Verification of bills payable (N19M)
483.05
INDO Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year 2018-
19. Being head-in-charge of the assignment, while planning, you distributed the work among your team
members and assigned Mr. Pary for verification of bills payable. However, Mr. Pary, being fresh to the
bank audits, needs your guidance. Kindly guide.
Answer Bills Payable:&$ '
+
$
!
$ ) !)

!
/
1 + + $I
+
) in standard printed forms.
Unused forms / + $I
+
) %
!
)

)%$reliable private code%! )
)
+

/
/ /)!)!

signatures on a demand draft)

%)!

/
)%
. telegraphic transfers and demand drafts )! )
) !

)! $
)

! + !/
)
) $
/ /)

&' /
) !)
$

/ # /)

$
)

-
)
! (e.g., responding advices received from other
branches, advices received from other branches in respect of drafts issued by the branch and paid by the other
branches without advice) )'
! / $ /
)

Author’s Note
ICAI has taken answer of this question directly from module . Question is only about Bills payable but
unfortunately answer is a mixed bag covering bills payable, DD, and telegraphic transfer.

CNO Claim Not Acknowledged as Debt (M10E, M12R, P17M)
484.0
How do you examine claims against the Bank not acknowledged as debts?
Answer ¾ Examination of Claims against the Bank not Acknowledged as Debts:
' $ $
+ '

!+

+ %<
%I<
I $
/ 0
<
0+

+/
/ + //

/ '+
+
!
/ )%
/

/ $!.$) $ $
$
)
$

CNO Contingent Liability (P17M, M17R, N19R)
485.0
While auditing APNA Bank, you observed that a lump sum amount has been disclosed as contingent
liability collectively. You are, therefore, requested by the management to guide them about the disclosure
requirement of Contingent Liabilities for Banks. Kindly guide.
Answer ¾ Contingent Liabilities
-/ )%
%/)
) ! ! $
) !
/'

/

4 /$)

x ,,
x ,
.

+ )/
"$%, ::

)%
/ !)
¾ Bills for Collection

CNO Audit of Guarantee Issued (M18E)
485.01
While doing the audit of a Nationalized bank branch, your audit assistant informed you that he suspects
some irregularities in Guarantees issued by the Bank. What should be your guidance in the matter to check
the same?
Answer ¾ Guarantees Given on Behalf of Constituents:
(Internal Control System)

$

/ + /+ /
+

/ + / % from

)
/
)
+

$/ +/+
%
! )
+

% +
%
!$

)%
+

(Register)
' / / %$

)

%/ ' / )/

% $ / / //
)
//

) ' ' /

(Letter of Guarantee)
*$!/
/ )! )%

/
$
*$!

/ ,
+

$ . 6P+ j$+ - /
) - / . G

)

/ )/

/ $)!
/
!
! )

CNO LFAR (N08E, P17M)

486.0
What do you understand by Long-form Audit Report?.
Answer ¾ Long Form Audit Report-
0 !
)$+
)

)%+ $
)%/)%
)
+require the auditors to also furnish a long form audit report (LFAR). The matters
which the banks require their auditors to deal with in the long form audit report have been
specified by the Reserve Bank of India.
CNO Risk Management (N16E)

488.01
Requirements of a Risk Management process/system in a bank.
Answer ¾ Understanding the Risk Management Process:
/ $

//%!)

%.
$%/ ! )%/! /5
"$%, :L
Oversight and involvement in the control process by those charged with governance:

/ /$
01<-&'
$
$written risk
management policies(Credit Risk / Operational Risk / Market Risk)
)

)%I ) )C
$ (Balancing growth & risk) /+
(Education Sector)
/ +/ ' +(Real Estate Loans) / !
! % /
)
Identification, measurement and monitoring of risks:
#%
/
!

$ )%I/) +
/ $
(Exposure to Real Estate
Sector)
Control activities:
.)%$
/ %+
/

x Credit Risk
o 9
$
+(Loan approval process)
o / (Limits for loan approval)

x Operational Risk
o &
$//
!+) )
%
+
o #

+(Say CASH reconciliation)
o !

!(Adequate guards for cash & investment certificates)
x Market Risk
o # / $'
(reporting big losses on investments)
o - /
! /(war, recession, demonetisation)
o .
/ + (Bond related data for

market risk)
x Monitoring activities:
#%/ + /
/ % ) /!
! )

)! % / (Internal Audit, Revenue
Audit, Concurrent Audit)

x Reliable information systems:

0% ) ! $
+

!
)

/ /$
/ %/
! )
//
)%I%
CNO NBFC -Applicability & differences in the presentation (N19E)

525 requirements between Division II and Division III of Schedule III
Mr. C has been appointed an auditor of LMP Ltd, T a NBFC company registered with RBI Mr. G is concerned
about whether the format of financial statements prepared by LMP Ltd. is as per notification issued by the
Ministry of Corporate Affaire (MCA) dated 1 October 11, 2013, The notification prescribed the format in
Envision III under Schedule Ill of the Companies Act, 2013 applicable to NBFCs complying with Ind-AS. Mr.
G wants to know the differences in the presentation requirements between Division II and Division III of
Schedule III of the Companies Act , 2013. Help Mr. G.
Answer ¾ Applicability of Indian Accounting Standards (IND- AS) on NBFCS
Accounting periods beginning 1 April 2018:
"02-$/ #:77
/+)!+
C $

"02-=

Accounting periods beginning 1 April 2019:

x All other listed NBFCs+unlisted NBFCs having a net worth of Rs 250 crore or more
but less than Rs 500 crore /+ )!+ C $

"02-
"$%, :
x net worth )

"02- 31st March 2016

/

x Format for preparation of financial statements by NBFCs under Ind- AS –

! - . -. $

) + 67M

Division III under Schedule III of the Companies Act, 2013, wherein a
format for preparation of financial statements by NBFCs complying with Ind-AS has
been prescribed.
¾ Differences Between Division Ii (Ind- AS- Other Than NBFCS) And Division Iii (Ind- AS- NBFCS) of
Schedule III
1$,,,"02- 1$,,""02-
/' '
/5
Classification & Order in Balance Sheet
"02-$) )
!

1$ ,, . !+ "02-

! )

!

Material Items Disclosure

."02- !
)!! ! Q
IQ
' I
'

1$ ,,+ +

!
'
'

$ #7%+
$/
Separate Disclosures
"02- !
Q
$)I+ ) !
) !

)
Common Point
"02-

/ Q$ I Q

$
I

Author’s Note
It is a hint answer. Students are advised to also refer the ICAI suggested answers.
"$%, :M
GIC
CNO Co-Insurance (P17M)

489.0
Write a short note on - Incoming and Outgoing Co-insurance.
Answer ¾ Incoming and Outgoing Co-insurance:
,
/%+ ))

/ /
//

)! /

$!
/

//

5
Incoming Co-Insurance: .

)
$ / ,
+

$+
)$

%!!)% !, )$)

)

/$
$)

$!
$

$

$
/
Outgoing Co-Insurance:

/
// )+
! )

%

$ %

/! )
/

CNO Types of Reinsurance (Facultative) (N10R, M14R, P17M)

490.0
Write a short note on - Facultative reinsurance under Insurance Act, 1938.
Answer ¾ Facultative Reinsurance –
, !
)!

%'

!

% ! &

$
) /
$!&
!

++
/
!

)
% !
$ %
$$ %
$ %, +$+ $ !+!5
.

$$!)'
%'

$)
!$!
)%

$
)
+

!
)

/

$! /

% ! )
)%$!+' +
/! +/+

Authors Note
Below page has the master chart to the types of reinsurance. Students can get a quick understanding of the types
of reinsurance by going through the chart. It is advisable to read it before starting the reinsurance topic.
"$%, :P
(

!
% Re-insurance
,

+, # , !
/!

&
%

/ ! !
)$77
+
Facultative Treaty 4/
.
+
)

/
!) $

C
,
/

!
+

,
/
! Æ, !+
!<
)
Non
Proportional

!
</

/< Proporitional
Æ#
$/
/

$
AutoFac
Quota Share Surplus Treaty Pool Excess Loss Stop Loss
Treaty
Æ#

!
Æ !
)

! Æ Æ
) !%<

<% )$' )$'
)/
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'!7

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+ +
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/

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0'
"$%, L7
CNO Types of Reinsurance (Proportional Vs Non-Proportional) (N16E)
491.0
Explain the difference between the Proportional Treaties and Non-Proportional Treaties?
Answer ¾ Proportional Treaties –
) +
+
/

/<

)
E !+ !+. 2

!
¾ Non-Proportional Treaties –
"

)! ) ) !)
/

! ) +

"
)
&'
+&'

-$$ )+&'

$"$ )+ .

CNO Re-Insurance (Outward, Audit) (N05E, N08R, N09E, M12R, N13R, N14R, S17M,
492.0 P17M, M17M, M18M, N19R)
Enumerate the steps to be taken by an auditor for the verification of Re-insurance outward by a General
Insurance Company.
OR
Steps to be taken by an auditor for the audit of re-insurance ceded
Answer ¾ Verification of Re-insurance Outward
/ !) %)! $

5

x *$! opening outstanding claims / !

/ /
$$

/
$)
) /
/
, + )!
x

%
/

parameters and guidelines applicable
$ !

%
$)

) $
/%

x , )
/$
) /'
//
x $! cessions $ )
agreements $

, ) commission
)

/
$!
profit commission $

! / /

/ / !
$!
underwriting returns
$
/ // +
+ /
!
/ +
/

' cash loss recoveries $ )

/)

$! - Outstanding Claims
list)!
)$
C

* provisioning for outstanding losses
$)
$
)
)!
C
+
!
) $
Accounting aspects

+

$)+

$+ /
$)
$ )

%
"$%, L

% percentage pattern / +

/

$C

% re-insurers balance
)
/)
//)

* $! )
)!
!
confirmation)
$ individual accounts !)

$/< )
%
.! major event after the Balance Sheet
/ $

)
///

$!) /

)
))/ )!
Author’s Note:-
This answer is taken from new study module. It may not match with the old answer.
CNO Premium (Audit, GIC) (N08R, N10R, S17M, P17M, M18R)

493.0
What are the steps to be taken while verifying the Premium of General Insurance Company?
Answer ¾ No Risk Assumption without Premium –
"%
))!
$.
/

L>90
,
.
+P8M+!%,
!

)
! !), !)

$/ ) )!

+!
)
)+
+!)
)+$

)

!/ /

)!
+$J+
$
)+

$
)

Verification of Premiums -Verification of premium is of utmost importance to an auditor. The
auditor should apply, inter alia, the following procedures for verification of premium –
¾ Internal Control System & Compliance
0

/ $

+ % internal
controls and compliance

/
)!$ systems)!
!

!+

!

¾ Cover Notes

cover notes / %$)!
)

) $!

% !
/
$ +
!
+ +

! ! /
$
/$

¾ Policy Documents
$! policy documents have not been issued,
5
not been collected =
)

) $ cheques have been dishonoured=
-10%=
!)

/)%/

) deposit or guarantee had fallen short or has expired or the premium
had been collected beyond the stipulated time limit + )%
/

=

)

risk cover being increasedwhere stipulated
limits have been exhausted

+

) )

$=
have not been collected

/

+ /+

! )/
)/ instalments

!!$))C

+
"$%, L6
/+ )!:
!)
)! ).
¾ Premium Register

% Premium Registers$)
/
!+

/ + /$/

/ $
'
/

$
! !) $! /
/ ! 4/
¾ GST
$! GST )
/ +
+

) ' $
' .
-
% 4

Q- ) I '
4$ I.

,

)+ $! GST
+
)
)
$! )
/

)!
!
-
% 4 <$
'

/ )!
!$)/!
4$ I.

¾ Advance / Periodical Collection / Outstanding
Advance
$! !

%
$/
!
%

/< / !
'
!

)
Premium Received
in Advance Account.
Periodical Collection
(
$ ) $ collect premium periodically (i.e.,
under instalment clause, special declaration policy or periodical declaration under open
policies in marine insurance)+

%

!)

Outstanding Premiums
$! /) )

+
$ +$)

!
.' / )
!$ )
/
outstanding premium.

¾ Revenue Recognition:
Risk Inception

risks incepting/ relevant
accounting year )

! )
$
/ +
+%
) ! % ))! /

$/ !) /
%

/ /!)
Q

#
$.$
I)
!"!+

$

/! / %

/ '
/ 4!+

#/
F-
#%G+
/
%

!

.
Early Recognition

% !collected by the agents
!
$)
$)!
!
%! )

Cut Off Date

$!

remitted by agents ! cut -off
date $! %/ !

"$%, L8
After Balance Sheet Date
$!

/)!agents after the balance sheet date to
see !

%

/ !

% )
/! //+
i.e., without providing for unexpired risks and reinsurances.

¾ Special Points
Reinsurance
' reinsurance company not under a risk

!/
/ ! /
5
Co-Insurance
,
co-insurance business+
! +)

$) ! $ !
)% $
/ %

/ $
/!

!I )
)

$) % $
/)! /
'

!)!
/ $/
!I

) $
(

! + ) )
!

!I )

$)

¾ Cancellation & Refund

Cancellation

%
cancellation
<
$ +
%)) )

Refund
( /!
$)refunded+ $!
/
!

)
` Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it in the same
manner to get better understanding of the answer. Words in “Headings in Comics font” which are used
as heading are only for helping students in retention. Students may or may not write it in the exam.
CNO Premium (Policy Issued Without Actual Receipt) (M13E, M16E,S17M, P17M, M18M, M19R, M19E)
494.0
You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got their
Plant & Machinery insured on 01-10-2018 but the amount of premium has been paid by them on 15-10-
2018. In the meanwhile, on 10-10-2018 a fire has broken out in the factory and the company filed a claim
for damages of plant & machinery with the Insurance company. Advise the insurance company in this
regard.
OR
As on 31st March 2017 while auditing Safe Insurance Ltd, you observed that a policy has been issued on
25th March 2017 for fire risk favouring one of the leading corporate houses in the country without the
actual receipt of premium and it was reflected as premium receivable. The company maintained that it is
a usual practice in respect of big customers and the money was collected later on. As an auditor discuss
the steps to be taken while verifying the Premium of Life Insurance Company.
"$%, L>
Answer ¾ No Risk Assumption without Premium –
"%
))!
$.
/

L>90
,
.
+P8M+!%,
!

)
! !), !)

$/ ) )!

+ !
)
)+
+!)
)+ $

)

!/ /

)!
+$J+
$
)+

$
)

.
¾ Calculation of Premium:
-
% .
/! + !)! - !+

$

!
-
% ! !

!

!.

¾ Accounting of ‘Advance Premium‛:

-
%+ !
) ! !/$

-
%
!/$

¾ Collection of Premium:
-
%

0% !)
-
% !

+
! )%

¾ Recognition of Income:
-
%
/ ! ) Q,
I
/
-
% )
!

!

$

-
%

!)

/ +!+
<

¾ Reporting of Premium figures to IRDA/ Management:

-
% /! / , !
$
-
%
%<-
%)/ ,
-
%

) ,

¾ Other Areas:
-
% $ )! -
!
)! <)
- !
& ! $ 1/ . ! ' !

/

// /
-
% - !

!)
-
% )
)
/! .

+
+E# /

7767M)
,
!
!

!$) ! !

, /$
+
7
)+67M
! ) :
)
67M+ .0-,
- ! ))
/
!
"$%, L:
Authors Note
x The answer above has been rearranged in the flow of logical sequence. Students should read it in
the same manner to get better understanding of the answer
CNO Commission Paid (N18E, N15R, N16M, P17M, M17E, N18M)

495.0
You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the year 2017-18. In
the course of your audit, you observed that the commission paid to agents constituted a major expense in
operating expenses of the Company. Enumerate the audit concerns that address to the assertions required
for the Auditor to ensure the continued existence of internal control as well as fairness of the amounts in
accounting of commission paid to agents.
OR
While auditing Secure Insurance Ltd., you observed that the major proportion of expense of the company
is the remuneration/commission paid to its insurance agents. As the auditor of the company, what audit
procedure would you adopt for verification of such expense?
Answer ¾ Commission:
Definition of Commission & Its 2 types

!)/ /
)
Q
I !
/ 1
)-

$ Q-

I

'

Internal Control Over Commission

/
/

/
!

/ / +
/ )/ )
/

+' + '

+4 $
/

$ ,
.
+P8M$)

¾ Role of Auditor: +inter alia+ /$

5
&
'
limits specified by IRDAI
&
rates with the agent and rates filed with IRDAI
& / is not blacklisted by IRDAI

&
agent/broker who has solicited )

%correctness of amounts

-
% vouchers are authorized by the officers-in–charge

'

+
)
Vouch disbursement entries
) $

)

Jagents’ ledger and the balances+'
$/) )

+
!+) "
!

$ )

-
%
/ )duly accounted.
Authors Note
The answer above has been rearranged in the flow of logical sequence. Students should read it in the
same manner to get better understanding of the answer . Words in “Headings in Comics font” which
are used as heading are only for helping students in retention. Students may or may not write it in the
exam.
CNO Claim (Internal Control System) (M18E, M04E, M10E, M13M, P17M, N17R,M17M,
495.02 N17M, N14E, N16R, P17M, N18M)
You are the Auditor of Good Luck General Insurance Company. You want to ensure that there exists good
system that effectively serves the requirements of true and fair accounting of claim-related expenses and
liabilities. Suggest how this can be ensured.
"$%, LL
OR
You are appointed as an auditor of United India Insurance Company Limited. What are the specific areas
to which you will give your attention while examining “Claims Paid” by a General Insurance Company?
OR
ABC & Co., Chartered Accountants are the Auditors of Just Care General Insurance Company Limited. As
on March 31, 2015 the Management made a provision for claims outstanding. Enumerate the steps to be
taken by the Auditor while verifying the "Claims Provision".
Answer Verifications of Claims:

¾ Claims Provisions –
Consolidated Figures
/) ! ! $<)

) !/ /
+)
/
$<)
+ *

$

/

Obtain information and Sampling
) $<)
+ each class of
business+
/J/
value-wise)

/$

I
$+
/
!) +
$ $
$

)
)
)

%/$/

$/$
Verification
! the estimated liability provided )!
/
$
<
% +% /$
/5
x intimation of loss
$ )
! %

x $)

/ !

!
! %+ e.g., a vehicle
insured at Mumbai having met with an accident at Chennai necessitating claim
intimation at one of the offices of the company at Chennai.

x $)!

!legally
liable+
/
!+ %
$ )!
!+

+
/

!
!=)

/
!
$ %+/+

$/ $)

L>90 ,
.
+P8M

!!) <

x ,

! $ Q $I Qdefault provision’
) ! /)!
$! $
$/

,

+

)!

!)
)
)!

%

) ,0"#

%

)
$)

x / $+ ‘average clause’)

)!

x $ is net of payments Q
I

$
! $))%

x
$ estimated salvage+$
)

"$%, L
x
co-insurance/ +
! $!

) ! $)

! )

/<

)! /
!

/<
/J/

) )
!
x $ legal advice ) /

/ +
$
/ /$I$

+!+
'
(Year End)
x the claims status reports
) )! 1$
//
/ !$)$

$
% /'
< $
)

) %
$ $

x / $, events after the balance sheet date
$)
+e.g., (a) claims settled for a materially higher/lower amount
in the post -audit period; (b) claims paid by other insurance companies during the
year under audit and communicated to company after the balance sheet date
where other companies are the leaders in co-insurance arrangements; and (c)
further reports by surveyors or assessors & (d), re-insurance cover available is
considered.
x $) claims !

)
/<

)! /
!

/<
/J/
) )
!
x $ $ ) !
guarantees
/$)!
! $-
/

(Special Point)
x $! '
'

/
!))C
/
/

+ $

$!
'
x $ ! / /

)

/ )
$$+
!/ $$)

x
!

+ $ + !
$

x
/ ) !

!

Others
,

) ! )! /

/ ) $ + ))/
I ) / ' /
2 /
! $
!
/!)+
! /
! +$+
$
/! ) (
) ! )

)
+ +)')!%/

!I ! / $ !

"$%, LM
¾ Claims Paid
! '

%/
//
/

)')!
5

salvage
$)!

)
!letter of subrogation))

=

! $)!sanctioned)! !

! !
%/)!
=
! /
partially settled$)!$
,

+

/ !)

=

+
/$unqualified discharge
note+ $$/
!! ) !

=
! $) 87!

$
,
+ !+interest on such delays$ ) ,#1.,/

(Special Points)

co-insurance / +
$))%!

!I )
))

=
/
+$

!)! 1$ *

reinsurance claims+ $ )

)

/

)advices

!

/ +

$)!
!

$)

!

! )
!

=
pure advances/deposits - +
+
/ <) $ )
)

,

+ $) /

=
Authors Note
manner to get better understanding of the answer. Words in “Headings in Comics font” which are used

CNO Claim (Audit Register & Records) (M17R, M18E)
497.0
Register and Records generally prepared in respect of Claims by Insurance Companies.
Answer ¾ //
/!

P-Paid #/ =
B-1) Bank Book=
I-Intimation #/ =
RReport !
=
D-Dockets,!
/ /
5
- +
+

!+ $! + / /
/+ I )+ )/ +
+ $
+

+

+ $/ + $/ +

/$
+
=
SSalvage /
-.
) !

/
/+/ /
' +
+$!+
)! - + $' +
/
/+
$

)
0
<1$
$) *
$
"$%, LP
Authors Note
Register is maintained for claims of Pea-cock BIRD (national bird)
CNO Investment (Valuation) (M07E, M09R, P17M)

499.0
State the procedure to determine the value of listed and unlisted equity securities and derivative
instruments of an insurance company.
Answer Valuation of Investments:
¾ Actively Traded:
B/S value = Fair Value:

x & !
1$ $
$% +
) 29 0
1
x 29_
/

%&'
/

Note:
$ % % +

/+$) !/)!+

)
!$)
Changes In Fair Value:
x AJ/</
/$ & !
$ $ ) % Equity under the head “Fair Value
Change Account”
x F <,$ G

/
$ $!
/J & ! F2 9 -// .
G+

+)/
!
3

!
x - )
F2 9 -// .
G ) $)

) $ 1) )

)

/
<2#$
/$
Impairment loss:
x

)
!

!<1$ $,

x , )
/J' '

) 2 $
! .
- +

)!!$, !
/J
x .!$!,
/J' +)

/J#$<3<

¾ Other than Actively Traded:

B/S value = Historical Cost:
AJ
$! & !
1$ $,
)

Provision for Diminution:
x $) $
$
x $)$) )
' $

$ ,$ $ -!/

!/ $ $
$ '
*
-
Impairment loss:
x

)
!

!<1$ $,

x , )
/J' '

) 2 $
! .
- +

)!!$, !
/J
"$%, 7
x .!$!,
/J' +)

/J#$<3<

Authors Note
manner to get better understanding of the answer

CNO Outstanding Premium & Agent Balances (M12M, M13R, M14E, N15E, S17M, P17M, M18R)
502.0
Mr. Bhavya is appointed as an auditor of General Insurance Company limited. State the verification
procedure to be followed by Mr. Bhavya in case of outstanding premium and agent’s balances.
Answer ¾ /
)$
/
/ I)
5
Check age-wise, sector-wise analysis /
9! / $
)collected.
-
% $) ! bank guarantee or premium deposit /

&' inoperative balances /$ )

!
& / old balances

$control account debit balances )

9!) )

!provision or adjustment" '
!)) / /
Authors Note
CNO Unexpired Risk Reserve (M8E, M15R , N15E, N19E)

503.0
Ordinary Insurance Ltd has made a provision of 25% on unexpired risks reserve in its books Comment
OR
RQ Insurance Ltd has made a provision of 25% on unexpired risks reserve in its books Comment
OR
You have been appointed as an auditor of a General Insurance Company. In this context, explain Unexpired
Risks Reserve and audit procedures for the same.
Answer ¾ Unexpired Risks Reserve:
Meaning
,

' 0
'
)! /!/

$/%

Computation
.
/ ,

.
+P8M+ /
$
!/+
5
x $ ' % :7
2+ -/

0
x 2*
)77

x $,
<PL,+PL6
)$#$

)
Case Discussion & Conclusion
¾ , /$
+ . !,
!
!
$!6:O/
):7O77O
)$+ )! /$
"$%,
CNO Contingent Liabilities (M11E, N12R, P17M)
504.0
State the disclosure requirements in respect of contingent liabilities in the notes to the Balance Sheet of a
General Insurance Company.
Answer ¾ /)

- / ) 5

-+
+
%/ )
#
)/ ' $

A /
/
! $
4 /$)!)
!
!<) $
)

Authors Note

CNO Receipts & Payments Account (M05E, M11R, M14R, M16R, P17M, N17R)
505.0
“In an audit of an insurance company, the Receipts and Payments Account is also subjected to audit”.
Comment on this statement in brief.

,
.
+P8M
¾ Receipts & Payments Not Covered under Sec 12 but Sec 11 Considers it as Financial
Statements

6 ,
.
+P8M
$ #

! .
*$+)

,
.
+P8M
$!+

)
)!

I+ +

!+0
+
.
+ .
#
! #$.

/ !)

#
! .
)

+ #
! .

)
¾ Regulation covers Receipts & Payments
. !+ '

)! ,
.
+ P8M+ ,#1.
2
. I # ,
- #/ +
6776#/

!
( #
! .
/ )%

' #
!
.
)

$ $
#
! .
/$ $

!
#
! .

CNO Solvency Margin (N06E, N09R, N11R, M12E, P17M, M19E)

506.0
Write a short note on - Solvency margin in case of an insurer carrying on general insurance business.

L>9. ,
.
+P8M

"$%, 6
¾ Solvency Margin in Case of an Insurer Carrying on General Insurance Business:

L>9. ,
.
+P8M)!,
. .
+67:
$! '
$ $
)
) :7O

L
.
$
)!
/
. !+)!!/ +
!$$
!/%Q
$
$
!I*$+

+ !!

$
$
$$
!)/
)$

,+ ! +
$ $
!
/+ )
. !
/

!,+
+ . ! +
!

$
!//

!
/
J )$$ )
! )
6
L>9.

!
) /
'
$ $ ) + )$ !)
)! -
)! !

CNO Trade credit (N16E, M18R, N18M)
507.0
“Trade credit insurance policy” and basic requirements of a trade credit insurance product.
Answer ¾ j

j
/ % ! /
$
)! )!!)
!
%
)!
!' %/ ! $
!
)! ! /)

! /$
)!
%
$

%
$$)!
)! ,
/
/

¾ Requirements of Trade Credit Insurance5

!N

$) arising out of a trade /
$

! /$
consideration for a fair market value.

!N
$) not arise out of factoring or reverse factoring
/ ! /

!
0! ) !
$)

! /$

$)!
!+in
accordance with a policy document filed with the insurer

!undertakes to pay premium
!
.!other requirement !)
)! . !

"$%, 8
LIC (NEW COURSE ONLY)

CNO Actuarial Process (M18R)

507.03
Briefly discuss the importance and role of auditor with respect to actuarial process for Life Insurance
business
OR
High Life Insurance is into life insurance business and has established presence in this field since last 25
years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company. While conducting
its audit, you come across several important actuarial processes being followed in accordance with general
regulatory guidelines. You also understand & realise that the actuarial department is calculating and
modelling hub of the company. In the above context explain the role of auditors.
Answer ¾ Actuarial Process:
(Change in Role from Supervision to Certification)
.
,
) $ /

.
!
$/

!

// !/

(Affects Pricing & Valuations)

C)
!
!,
- !$$+
! !%

//)
- !( ,
)

/
!$

¾ Role of Auditor:
(Certification of Actuarial Valuation)

. .
!+
$
) !
)!
!+
/

$

/+!+
)! !< .

!,

,#1.

(Certificate of Actuary & Evaluation of Actuaries Work)

*
+. /!! -
)! . .
!+
!/

! ) *$+ . !
.

)!)
!/
!)

¾ Actuarial department broadly concentrates following key areas of Insurance business:

P
1$ <
/&'
!
M1$
S !9 $/
B/
S$
!/
M/ /$)$ ) !
,
)
Authors Note
Actuary concentrates on
Weekdays – “PMS” (portfolio management services)
Weekend - “BMS” (book my show)

CNO Premium (Audit, LIC), Premium Collection, Accounting and reconciliation (S17M)/ (N18R)
507.04
What are the steps to be taken while verifying the Premium of (b) Life Insurance Company?
OR
"$%, >
Auditors should evaluate various sub-processes, employed by the Insurance Companies in accounting of
premiums like collection of premiums from the policy holders, booking of premium, banking, accounting
and reconciliation of the same. In view of above, you are required to briefly discuss some illustrative
points, auditors are required to follow during the Audit of Accounting of Premiums in case of Life Insurance
Companies.
Answer ¾ Calculation of Premium:
-
% .
/! + !)! - !+

$

!
-
% ! !

!

!

¾ Accounting of ‘Advance Premium‛:

-
%+ !
) ! !/$

-
%
!/$

¾ Collection of Premium:
-
%

0% !)
-
% !

+
! )%

¾ Recognition of Income:
-
%
/ ! ) Q,
I
/
-
% )
!

!

$

-
%

!)

/ +!+
<

¾ Reporting of Premium figures to IRDA/ Management:

-
% /! / , !
$
-
%
%<-
%)/ ,
-
%

) ,

¾ Other Areas:
-
% $ )! -
!
)! <)
- !
& ! $ 1/ . ! ' !

/

// /
-
% - !

!)
-
% )
)
/!
Authors Note
CNO Policy Lapse & Revival (S17M)

507.05
Briefly explain the term policy lapse and revival in case of Life Insurance Company and role of auditor in
verifying the same.

86 ,
.
+P8M

"$%, :
¾ Policy Lapse and Revival:
(How to keep Policy “In Force”)

, %

! F
G
! !
!< !<<)

(Grace Period)
, ! + :<87!
%/ ! F/
G,
!
% ! /
+
!/ F G + !
/
) !

(Lapse not defined but its treatment is defined)

F G

!/ !
F G
/ +'
/ F
!

$)% $ '
(Proportionate Sum Assured)G $
86 ,
.
+P8M (Policy
acquires surrender value when premiums for full 3 years is paid to insurance company)
(Affects Stakeholders)

%K
!+/ .

!
$

, )

!

! / ./ /

!
(Revival)

! +
/
+
! ) !)$$/
$$+
!

$!)
) !

!) $! )) %
!

(Monitoring Renewal Premiums)

$ % /

,
+
!
%$

!/ ! + )!
!

! !
¾ Role of Auditor:
(Monitoring / Lapsed & Revival Treatment)

!)C
$

%

!
% F G

</
,
$$ +

%

/

) )$$/
!
Authors Note
manner to get better understanding of the answer . Words in “Headings in Comics font” which are used
CNO Investments (Audit) (S17M, N19R)

507.06
ABC & Co., Chartered Accountants are the Auditors of Just Care Life Insurance Company Limited.
Enumerate the steps to be taken by the auditor while verifying the "Investment".
OR
Auditor’s considerations while reviewing of Investment Department of Life Insurance Company.
"$%, L
Answer ¾ Investments:
,$ ,

I

!I
!I
) // % %
,$ / $
) ! /$
/5

., !/
! )
$
$ !
!)
+

! ! ) )/
$ /$
$
/ + %+

!+ /

,#1.,$ / +6777/$

2 ,

)+)% $ !/$

¾ The overall functioning of the Investment function should include the following independent
functions:
,$
</%
,$
K-
+#%/ +# /+#

!K-/ +1 +0% +- !
,$
/K2
/+".9

¾ Role of Auditor5. /review of Investment Department!

/5
#$ I Standard Operating Procedures

) )! ,#1.
#/
$ / $

#$ ,$ /
segregation of duties
) ,$ 2
+
0
%

x -
Investment regulations+$

)!,#1.
/
,
.
+P8M
x & ! ))
! $Regulatory limits
&' # /)
#$IInvestment policy
#$
/
Investment Committee
#$
Controls+ J

1'
+

#$ I Cash Management System
% $) ,$

/ )/ )
+

! )$
!
)!$) !

/ 2 I!
)) ,$ )
#$ wise reconciliation ,$ .
+ 0%+ -

#$IDisaster Recovery, Backup and Contingency Plan.
& ) I
!I+%/

) $ !
/ 3 "
/+
34
/3"
/A %2
#$ / reconciliations of holdings I

#$

%IInvestment Accounting and valuation policy

I risk management policies
/ $ %

% %+ !%+ %+

1 ' activities outsourced
$

$
"$%,
- $NAV computation and declaration.
- $various system interfaces
/ +)

)
%
+ ,$
/!

Flow of data from PMS ,$ .
/!

- personal dealings+ / /
Authors Note

"$%, M
LLP
Authors Note
LLP audit - PARAM covers those question which are asked by ICAI in EXAMS, RTP, MTP, SM, PM. Don’t
worry that there is only one question covered in this chapter . ICAI collection is most important and that
itself is huge, so we didn’t include new questions from our side we may issue new questions in future.
CNO Aspects (Audit and A/cs Maintenance of LLP) (M19R)

507.25
MKc LLP is a newly set up LLP (Limited Liability Partnership). The operations of the LLP have been picking
up and management is currently in the process of setting up processes and procedures in place. As per the
understanding of the management of the LLP, its accounts would not be required to be audited mandatory
because of its operations but still the management has decided that they would get the accounts audited
voluntarily. In this regard, the management would like to understand some of the aspects which they
should consider not only limited to audit but also about the maintenance of books of accounts as per the
relevant laws. Please advise.
Answer ¾ .))/

/ $

$!)

#6>#677P

+ + $ !+ $ '
+!
!+
!% +
) '
!$% +
/
*$+

) !
/

+
) !

¾ Appointment of Auditor: !) )! /

. !
!) )
!+
. !!

!
!+

$

!
+

$

!
)!$
! / $

¾ LLPs are required to maintain books of accounts which shall contain

!
$ ' )!

' %
+
.
) +

/
+$ +% /+/

/+
.!

!

¾ Theauditor should read the LLP agreement & note the following provisions
" )
.

) )!

, K

)
1
1/
+

!)
0/
#/ 3

"$%, P
CO-OPERATIVE SOCIETY
CNO Important Aspects of Co-Operative (M11E, M13E, N13E, N14E, N15R, N15E, M16M, N16E, P17M,
508.0 Society M18M)
What are the important points related to “co-operative society” which auditor should know.
Answer 2/ %
$
!5

(Related to Auditor)
¾ E
. (CAs / Diploma in Co-operative Accounts are also allowed)
¾ . . (Appointed by Registrar but report is submitted to both Registrar & Co-
operative Society / Fees decided as per various criteria like working capital, here working Capital
means paid up share capital + Accumulated Profits + Money raised

Books of Accounts
¾ 0%+.

- $
/$

>8+, %

+ /

!
)%

Balance Sheet
¾ !,$ #/ , C %' / %! 3
$
¾ ,$
.
/
86 - .
$
!!)
.
!!$ ! /5
,!

67 , .
+MM6
, - - $0%
,!
$)%+ -
$+as approved by registrar
, +
+)) !
! ) !
,! )!- 4$

¾ Restrictions on loans
. /
! % ! ) (

#/ +/
!!% /
!

6P 4$ !

% /

! )

!

)

¾ Surety Register
,

$

/ ) / )
)!
!/$/
! ) +
!/ /$)! ), %
)
) !+ / ) )!

) !)! /
+/

¾ Restrictions on share holdings

.
/
: - $
.
+P6+

!
) !)
! +)
! /
!

! '
' !

) $/ #+777<

$
! )

$
! )
/
/ .
! $ /+ $
- .

¾ Restrictions on borrowings
. /
! !
) )C

)!
! $ ' )!

87

"$%, M7
¾ Fixed Deposits Register
,
A)- $0%

/ )+'

/ ) /

+
!+ + !

(P&L)
¾ .
88 - .
6:O be
transferred to Reserve Fund+) ) $) )*$+$/
/

!+ #/ !

/ +
) !
+ 7O4!+
! !I

)$ %

¾ Contributions to Charitable Purposes

.
/
8>+/
!!+
#/ +
)
'
/7O /
! $
!
)
6 - )& .
+MP7

¾ Investment of Reserve Fund outside the business or utilization as working capital

.
$
!! #$25
, )
!+ %/
)C
)
(Lending, Goods for Farmers, Consumer Goods etc)
!$ $ .

! ) )
%! )C

!
(Importance of Savings, how to do farming, how to save money in goods)

.
# /
¾ Contribution to Education Fund
.
$ $!
!
) ! &

2 2
!+

!- )
&
2
/
Authors Note:
This is the master answer to important aspects of co-operative society. Individual questions are asked on
the points mentioned in the answer. You will notice that the questions further will have mention of this
answer.
CNO Important Aspects of Co-Operative Society (N14E,M16M,P17M,M18M)

508.0
Restriction on shareholding in a Co-operative Society.
Answer Refer CNO 508.0
CNO Important Aspects of Co-Operative Society

508.0
Restrictions on investments of funds of a Central Co-operative Society
Answer Refer CNO 508.0 - Point 5
CNO Special Features of Co-Operative Audit (M04E, M08R, M09E, N10R, N10E, M12M, N13R,
509.0 M13R, M14R, P17M, N17M, N18R, N18M)
Special features involved in the audit of a Co-operative Society
Answer SPECIAL FEATURES OF "CO-OPERATIVE AUDIT”
(Most Important)
¾ Observations of the Provisions of the Act and Rules
.
$
! / $
- $
.
#)!

/
) !)! !) .

"$%, M

! $+
) )! (Delhi: - In no
co-operative society, the dividend shall exceed 18 percent per annum on paid-up share capital.)
(2nd Most Important)
¾ Adherence to Co-operative Principles
$
/+ )C
+

$
/ + $ )
$
%/

! +) ' /) )$

!- $
) !)%

)

2
$
$ +

/ +

+

/+)/ !

) *$+

!

/ /
)
$

$ ( / ' +
!

!
/
+
)+$
)!
)
!
The principles of propriety audit should be followed for the purpose.
(Debt Related Points)

¾ Verification of Members‛ Register and examination of their pass books
&' ) )%// /$ ! +

)
$!

$/
)%

!+ /

+)

//
+

%/) )+

C/

¾ Examination of overdue debts

$) ' $! $!$ )

$ ) )! $ ) $
/

%/

!,
%/
.
! $) $

$!$ )+
!$ )
/) $

$) )
!
/
$) %/
$
$ )
!+

/
/

$! %+ //

$
+1
-

¾ Certification of Bad Debts
.
// / )) - $
#+PL+$! / . #">P+))
) !
!
))! 0)
$)))/
/ 01) 2+#$2
)
))
$)
)! (
' + //

!
¾ Overdue Interest
$ )'
/

/
$

/
+

$,

+$ $
+
$

I
¾ Valuation of Assets and Liabilities
*$+//$

$
.

#
/) /

/ /

$

$

'
+ $ 2'
)$
$

'

"$%, M6

' ) !
,

/

%

//

+
// % $!) = $
/

)$
%
+
$
#// ) + %) )/

+

/ ) )!!
¾ Special report to the Registrar
1/
+
/
%/
!!
#/ +/

#/

! %
!

/
!, /
+

!)

!5
(E-MAP)
P /)!)//

!+

!
!(Allocating contracts to
family members, taking decisions beneficial to own business etc)
1
/ E' +
+ !
!
(Excessive payments, personal expenses paid from co-operative society)

' M/ 1
/ /
$

(No proper meetings & decisions, decision to make profits and have luxury
office is against co-operative principle)
,
)
$ )%+ A$
$
/ +
$ / + ) //
)
$!
-
% $
/+ / // ) %/

! /C//
!

¾ Discussion of draft audit report with managing committee

+ %
!
!
$
//
/
$)

//
/ !)/

!)

¾ Audit classification of society
. C/ $

!+

!C/ ))

)! #/ , !)
/
! )
+
%
#/ + #/ !
$

)$!
+%/
)

!
Authors Note
If the answer is of 4 marks, only write the heading and 1-2-line explanation. Write the entire answer in
detail only if number of marks are more.
CNO Special Report (M05E, M08R, N09E, M11R, M13R, N16R, M16R,
510.0 P17M, N17R, M17R)
Mention the duties of Auditor of Co-operative Societies in regard to the following:
(i) Over-due interest.
(ii) Compliance with provisions of Co-operative Act and Rules thereunder.
(iii) Special Report to Registrar of Co-operative Societies.
Answer (i) Examination of overdue debts
#-":7P+ L

(ii) Observations of the Provisions of the Act and Rules

#-":7P+

(iii) Special report to the Registrar

#-":7P+ M

"$%, M8
CNO Schedules to Audit Report (N13R, N16R,P17M)
511.0
An auditor of a Co-operative Society governed by Cooperative Societies Act, 1912 is required to attach
schedules giving certain information. Please list the information required to be given in the schedules

- $
.
+P6
¾
- $
.
+P6

!

' $) +!+$ )
!
. +
) $

$
! $/ +
+ $ .
+ + )!

!

)) )! +

)$ +

)

2 ' + #
- $
.
%
/
)%
+

+

¾ Schedules to Audit Report: - (ME –CS)

, )$+ $

//
/ 5
.

) Contrary to the provisions of the Act, the rules and
bye-laws of the society. (Eg Loan to non-member)
.S+
/ $)+) $not been brought into account by the society.
(Eg Donations received not yet accounted because no consensus in which fund to credit)
.! + !)//
!
)bad or
doubtful of recovery. (Eg Obsolete Inventory or Loan given to defunct co-operative
society)
.!material irregularity or impropriety in Expenditure or in the realisation

!(Eg Excess payment in celebrating birthday of chairman, political contribution)
.! matters specified by the Registrar in this behalf.

,
! )$ + $ /$

CNO Multi State (Powers & Duties of Auditor) (N06E, M15R, P17M,M19R, N19R ,N19E)
512.0
Powers and duties of an auditor of a Multi-state Cooperative Society.
Section 73(2) of Co-operative Society Act 1912
Requirements
¾ Powers of Auditor
&$!
$
!$/

)%
$

$
!+ %

$
!+)

!
$
!

' ! %
!

¾ Inquiry by Auditor
.
86 %/!5
( )%
$
! !
$)
+

!+)
$

+

!)
$+

)% )

/ /
( $
)!
$
! )

!$) !

!$)
"$%, M>
C

$
! )+
( ' $)
/ $
+
(

$
!
!
)!)% C

$
!+

CNO Multi State (Special Auditor) (N16E,N18M,M18M)
513.0
Under which circumstances can the Central Government appoint the special auditor of a multi State
Cooperative Society?

- $
!.
P6
¾ Special Audit

4$

A

- 4$ 5
!
$
! )//

$

)
=
!
$
! )/ / %!

C! / ! )

=

!
$
!
/
$
!

4$ ! ! )!

$
!I

!)
+)

))

6 - .
.
+P>P
$
!I

*$+
4$
!
4$ 4$ )! ) !

$
!
"$%, M:
NBFC
CNO Types of NBFC (N05E, M11R, M13R, P17M)

514.0
What are the different types of NBFCs registered with RBI?

>:,
>:,
#0,.
+P8>+PP
¾ NBFC Business
,
>:,
>:,
#0,.
+P8>+PP+
"02-
)
$/
+

/+$
+

/

¾ AFC
- #0,-
1
)L+677L+

/< !

$<

$ !)
. 2
- !.2-

/
)
)
<$

<,
2
- !,
+ /
/"02-
/5

¾ Classification
- !+"02-/ #0,)/
5
CLAI3M!"02-

C,$ - !-,-(For financing of a particular business group, TATA Capital
Limited)
L- !-(For loans other than those covered by AFC or any other category)
A 2
- !.2-(Berar Finance Limited)
I$ - !,-(Business to invest in financial securities)
I
2
- !,2-(Only 9 such companies in India, L&T Infrastructure
Finance Company Ltd)
I
1) 2 " 0%/ 2
- ! ,12"02- (Only 4 such
companies in India, L&T Infra Debt Fund Ltd)
"0%/2
- !M
2
, "02-2,(Bandhan Financial
Services Limited)
CNO Compliance with Prudential Norms (N08E, N12E, N13R, M15R, M16R, P17M,
515.0 M18M,N18E)
You are the auditor of IJK Ltd., a NBFC registered with RBI. How would you proceed to ensure the
compliance of Prudential Norms directions by it.
Answer Compliance of Prudential Norms by NBFC:
¾ Verification by Auditor
$!

/
. /$/$
<$
x ) $ ! )

x ) / // =
x "

,
,$ - !+"02- " "02-
:O !/) 6:O !/
/ )
/$ )!"02-/ !
/// $ / / ) ' :O 6:O
"$%, ML

$!$+

$ / !</
) ' 6:O >7O
$!

"02-9!

' +$ )!

"02-

)
/
0 "02-
!/ /
<

. /$/$

<$
x ,

/ .$
=
. J
/
) %
x ,
$ =
"02-
$

)
/J
)

x .

o $!

$

<) <) < $
)

o

%". $! $!
/
!! ! $)
$
!
)"./
!
x $)) ) =
x -
!=
x ,$ 9
-
% $ $)$

"02-
"1
$ % $

+$
)+$) / +
)! 1

CNO Investment Co (Audit) (M08R,N15E,S17M,N18R,M19M)
517.0
You are appointed as the auditor of a NBFC which an Investment company is registered with RBI. What
shall be the special points to be covered for the audit of NBFC in case of Investment companies?
Answer ¾ INVESTMENT COMPANIES: -
(Buying & Selling)
¾ 9! Board Minutes for purchase and sale of investments.
0
) /

investments so
acquired are current investments or Long-Term Investments.
¾ check bills/contract notes
$)%

$k$

%%
$
(Conditions while Purchasing)
¾ "02- " "02-should not lend more than:O
!/) 6:O !// )

/ $ )! "02- / ! ///
$ / / ) ' :O 6:O
$!
$+

$ / !</
)' 6:O>7O
$!

"02-
9!

' +$ )!

"02-

)
/
"$%, M
¾ ) )!</
/ $!
investments made in subsidiary/group companies/ !.
)
$/

¾ -
% investments in unquoted debentures/bonds $ )
$ )

/

(Income)
¾ 9!
same type or class are received back)! < )!
)
/
)
$+/ +)+ ! / )
/

(Verification / Confirmation / Valuation)

¾ Physically verify
)!"02-(!
!/
)%+

)%<
)
$
¾ ,
<
/ !+) confirmation from the
depository// <
)! ) "02-
¾ -
% $ $)valued in accordance with the NBFC Prudential
Norms Directions $ % $
+$

)+$) / +)! 1

¾ . $
requirements of AS 13 “Accounting for
Investments” ' !
1
$)!

)! "02-
(Securities Lending / Borrowing)
¾ 9!charges received or paid

<)
¾ Obtain a confirmation $ ! //

<) !
CNO Hire Purchase Co (Audit) (M09E, N13R, S17M, P17M, M17R)

518.0
You are appointed as the auditor of a Hire-Purchase Finance Company. Enumerate the verification
procedures in relation to audit of such Non-Banking Financial Company.
Answer HIRE PURCHASE FINANCE COMPANY
¾ .
"02-adequate appraisal system' /

! )
!

) / // credit
worthiness +'
+ +
%

C

(Acquisition of Asset)
¾ 9! payment for acquiring an asset)
! <
/$
) "02-
(Registration Certificate)
¾ ,

/ $
+

%whether the registration certificate contains
an endorsement$

!
(Insurance)
¾ 9! /$
$)adequately insured/

(Installation & Valuation Report)
¾ ,
/$
/
!< +

the valuation reports and installation reports are called ,
/
$ + !
!$! +
!
!) / /

"$%, MM
(Instalments)
¾ -
% hire purchase instalments are being received regularly !
-
% $ ) $

)! "02- "

(Method of Accounting)
¾ &' method of accounting followed by the hire purchase finance company

/$

.

/
/
!
/ $!
(Verification)
¾ $! "02-!
verifying the hire purchase
assets periodically $
)

CNO Equipment Leasing Co (Audit) (M07E, N10R, M10E, N15R, N16M, P17M)
519.0
Write a short note on the special points that may be covered in the audit of equipment leasing finance
company.
Answer EQUIPMENT LEASING FINANCE COMPANY
¾ .
"02- ! ' / /

(Agreement)
¾ 9! /
/$
(Insurance)
¾ .
"02- ! / $)
!/ /
)/
)!

(Installation & Valuation Report)
¾ $! !
/

!
$
,
C
+
/ !
$
! )
/
'
/ )/

(Accounting)
¾ . $! . )! , - .
,

F.
/G)

!
CNO Loan Co (Audit) (M15R, N16M)

520.0
An auditor has been appointed for the audit of a loan financing company, registered as an NBFC. You are
required to state special points to be kept in mind while auditing such company.
Answer LOAN COMPANY: -


¾ . $! "02-adequate system of proper appraisal and follow
up of loans and advances, +!!
$!

"02- $!/$".
(Sanction)
¾ . '
$
)properly sanctioned
(Conditions Attached)
¾ * $! conditions attached to the sanction
$

)/+
!+ + ! +

"$%, MP
(Security & Agreement)
¾ . $! security obtained and the agreements entered into+!+

$
/$ *
$

! )</ '
$

)
)

(Own Shares)
¾ -
% "02- $
!/
! own shares.

(Limit)
¾ -
% "02- <$ in excess of the specified limits ! /
)/ ) "02- "1

(Classification)
¾ -
% classification of loans and advances
/)

)!
"02- . + ) . +)
!
$)) ) )!"02- "1

(Confirmation)
¾ ) balance confirmations

(2 Special Lending)

(Bill Discounting)
¾ ./)
/+$! proper records/documents$) $!
)
<
)! "02-

%

/
/+$++$)
!
)! "02-

(Inter Corporate Deposits)
¾ ,

// ) $/ ,-1
% +
"02-/!
/the
credit worthiness of the clients
)!
!)/$
!%
$!, +
"02-
$/
/!
,-1 # $ ,-1

) /!

% ,-1 )
".
CNO NBFC-Investment & Credit Company (N19R, N19M)

520.05
Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team members
of the audit team who audited this NBFC have left the firm and the new team members are 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 procedures should be
performed in relation to audit of NBFC - Investment and Credit Company (NBFC-ICC).
Answer Investment Business Related Points
Buying & Selling
¾ 9! Board Minutes for purchase and sale of investments .
0
) /

investments so acquired are
current investments or Long-Term Investments.
¾ check bills/contract notes
$)%

$k$
%
%
$
Conditions while Purchasing
¾ ) )!</
/ $! investments made
in subsidiary/group companies/ !.
)$/

¾ -
% investments in unquoted debentures/bonds$ ) $
)

/

"$%, P7
Dividend & Interest
¾ 9! dividend income wherever declared)!
!+)duly received by an NBFC
interest wherever due]except in case of NPAs^has been duly accounted for
¾ "02-Prudential Norms directionsdividend income on shares of companies and units of
mutual funds to be recognised on cash basis
¾ *$+ "02-option to account $
on accrual )+
)declared by the body corporate in its Annual General Meeting /
$
! ) )
¾ Income from bonds/debentures of corporate bodies )
accrual basis only if the

interest rate on these instruments is predetermined and interest is serviced regularly and not in
arrears

Verification / Confirmation / Valuation

¾ Physically verify
)!"02-(!
!/
)%+

)%<
)$
¾ ,
<
/ !+ ) confirmation from the
depository// <
)! ) "02-
¾ -
% $ $)valued in accordance with the NBFC Prudential Norms
Directions $ % $
+$
)+
$) / +)! 1

¾ . $
requirements of AS 13 “Accounting for Investments”
' !
1
$)!
)!
"02-

Securities Lending / Borrowing

¾ 9!charges received or paid

<)
¾ Obtain a confirmation $ ! //
<
) !
¾ 9!
same type or class are received back)! < )! )

/
) $+/ +
)+ ! / )
/

Loan Company Related Points

(Own Shares)
¾ -
% "02- $
!/
! own share.
¾ . $! "02-adequate system of proper appraisal and follow
up of loans and advances, +!!
$!

"02- $!/$".
(Sanction & Conditions Attached)
¾ . '
$
)properly sanctioned*
$! conditions attached to the sanction
$
)/+

!+ + ! +

¾ -
% "02- <$ in excess of the specified limits ! /
)/ ) "02- "1

(Security & Agreement)

¾ . $! security obtained and the agreements entered into+!+

$
/$ *
$

! )</ '
$

)
)
(Classification)
¾ -
% classification of loans and advances
/)

)!
"02- . + ) . +)
!
$)) ) )!"02- "1

(Confirmation)
¾ ) balance confirmations

(2 Special Lending)
"$%, P
(Bill Discounting)
¾ ./)
/+$! proper records/documents$) $!
)
<
)! "02-

%

/
/+$++$)

!
)! "02-

Author’s Note:-
In this answer the points are simply combination of CNO 517.0 and 520.0.
CNO Report to BOD (N07E, M16E, P17M, M17E)

522.0
List the matters to be included in the ‘Auditor’s report’ in the case of Non-Banking Financial Companies
(NBFCs).
OR
What are the specific matters to be included in auditor's report in an audit of Non -Banking Financial
Company (NBFC) not accepting public deposits?
Answer ¾ Matters to be Included
)
. I 01
5 I

)%/

!
/ +
!
All NBFCs
,
"0%/2
-
(COR)
x -
/ "0%/ 2
.
$ ! $ -

#/ -#/ )! 0%

9 #0,.
+
P8>+
!// ))%/

>:, #0,.
/

0 - 2
<
$ 0%I
. 7M+ PPP+
)! 1"0#+
'
! ) -
#/ -#
0%
(Principal Business Test)

x ,

!/-#)! 0%+
!

-#
0 -
2
<

8
)!

(Net Owned Fund)

x 3. ( )%/

! /
1
"0%/2
- !
" !
! , "1 %/ - ! #$ 0%
1
+ 67L 1
"0%/ 2
- !
!
!, "1 %/- !1 %/- !
#$0%1
+67L
Systematically Important if Asset Size above 500 Crore
Non-Systematically Important & Non-Deposit taking NBFC (ND-NBFC)
Systematically Important & Not Deposit taking NBFC (SI-ND-NBFC)
Systematically Important & Deposit taking NBFC (SI-D-NBFC)

(Certificate from Statutory Auditor)

x " 5 &$! )%/

! ) Certificate from its
Statutory Auditor // ) )%/

/ -
#/
>:.
#0,.
/) .

!.
/

!
!

8 !)) #/
1
"0%/ $ C
)%/

! / + within one month from the date of finalization of the
"$%, P6
balance sheet and in any case not later than December 30th of that year.
!. I-
.- )) )!"02-)
)!#0,

NBFCs holding Deposits

,
)%/

/</ )

.
.)$+

/ +!
(Regularization of Deposits)
x ( )
)!
!'

) $"0%/2
-
.

)
1 #$0%1
+67L/J
$ 1
=
(Rating)
x ,
)%/

)$+

/+
'
)
/ )! - # / ./
"0%/ 2

- .

)
1 #$ 0% 1
+ 67L

=
(MIGR)
x ( )%/

!
/j )
G
$ /
/ $
//
!
$ "0%/ 2
- .

)

1 #$0%1
+67L=
(Limit as per Credit Rating Agency)
x /// / ! /
!'

)!
- # /./
!=
(Deposits within the limit?)
x 5. ( )

)!

! /
)/
)$J
o )
)! unsecured non-convertible
debentures/bonds;
o shareholders (if it is a public limited company);
o
'
Q )
I
"0%/ 2
- .

)
1
#$0%1
+67L+ )

! $ "0%/ 2

- .

)
1 #$0%1
+
67L=

(Computation of CAR)
x (

!
)
0% "0%/2
- ! !
!, "
1 %/- !1 %/- !#$0%1
+
67L)

!

-#.#
) =
(Liquidity Norms)
x (
!

))! 0%'

>:,0 #0,.

/ )%
qL

0% "0 8="0%/2
- !
# #$0%1
+67L=
(Default of Interest)
x (
! !/ <

<
)
=
"$%, P8
(Compliance with Prudential Norms)

x (
!

/ +
/ +

+ $/ )
) ) +

< $

1
)! 0% 1
"0%/
2
- ! !
!, " %/- !1
%/- !#$0%1
+67L=
(Return of Deposit)
x (
! 0%

"0 K"0%/2
- !
# #$0%1
+67L=
(Quarterly Report)
x (
! 0%
!
"0%/ 2

- !# #$0%1
+67L=
(Violation of Public Deposit Direction)

x (
!$ !

)

$ "0%/ 2
- .

)
1
#$0%1
+67L=
(New Branches)
x ( +
/)

' /)
<

/ +
!

"
0%/ 2
- .

)
1 #$ 0%
1
+67L
NBFCs Not Accepting Deposits
(C),
)%/

!
/ )
.

.)$+
/
+!5
(Board Resolution)
x ( 01

!
)
=
(Acceptance of Deposit)
x (
!
! )

/ $
<!=
(Classification)
x )%/

!)

!
"02-

2
, 2, "0%/2
- !
K " !
! , "1 %/ - ! #$ 0%
1
+ 67L "0%/ 2
- ! !
! ,
"1 %/ - ! 1 %/ - ! #$ 0%
1
+67L
(Systematically Important NBFC)
x ,
!
!, " %/"02-"
0%/2
- ! !
!, "1 %/- !
1 %/- !#$0%1
+67L5
o (

!
)
0%"0 +)

!$

-#.#
))! 0%=
o (
! 0%

+% <' % "0

"$%, P>
(Prudential Norms)
x (
!
/

/ +
/ +

$/)
) )
) "0%/2
- !K"
!
! , "1 %/ - ! #$ 0% 1
+
67L "0%/ 2
- ! !
! , "1
%/- !1 %/- !#$0%1
+67L=

NBFC not required COR

(D),

!// ))%/

-#)C

.
.,)$
!)

$
0%
-# 0%+

!

!/
$)! 0%

Reasons
x # ) $) (+
I + //! /
8 )$ $) + I

$) +
!)(
) ' ! !
/ 8 )$+

/

Exception Report
x 2. )/ ) '
0%
o (I)(+
)%/

!+
// ! / 8 )$+
$)+
!

5
- $- ,,,0#0,.
.
6P8>=
- "0%/2
- .

)
1
#$0%1
+67L=
- "0%/ 2
- ! K " !
! ,
"1 %/- !#$0%1
+67L
"0%/ 2
- ! !
! , "
1 %/ - ! 1 %/ - ! #$
0%1
+67L

, ) )/ %

/

$) <)

+

!)+

!

#/

1 ")%/ $ 0%C

/

!

"0%/
2
- .

)
1 #$ 0% 1
+
67L
x ! . ) / , ) !

$ $ #0, .
+ P8>+ 1
+ 4+

) /

!

! $

CNO Exception Report (N16E)
523.0
What are the obligations of auditor to submit Exception Report to RBI in case of nonbanking financial
companies?
Answer
Exception Report
)/ ) '
0%
"$%, P:
¾ (+
)%/

!+ // !
/ 8 )$+ $) +

!
5
$- ,,,0#0,.
.
6P8>=
"0%/ 2
- .

)
1 #$ 0%
1
+67L=
"0%/ 2
- ! K " !
! , "1 %/
- ! #$ 0% 1
+ 67L "0%/ 2
- !
!
!, "1 %/- !1 %/- !#$
0%1
+67L

, ) )/ %

/

$) <)

+
!)+

!

#/
1 ")%/
$ 0%C
/

!

"0%/ 2
- .

)
1
#$0%1
+67L

¾ ! . ) / ,) !

$
$#0,.
+P8>+1
+4+
) /

!

!
$
CNO Frauds (M14E, N16R, N16M, P17M, N17R, N17M, N17E,

524.0 N18M, M19R)
Under what heads can the frauds committed by Non-Banking Financial Companies (NBFCs) be classified?
Answer ¾ Classification of Frauds by NBFC (RBI Circular July 2015)
, $ ! /+$)
)!
$ ,-5

breach of trust.
"//

shortages.
Fraudulent encashment // + )%

/

$ !
Unauthorized credit facilities' //

Cheating and forgery.
,/ foreign exchange

Any other type
/

)$
- Q//

/I Q/ / '
/
I
))$ )
<

< $*$+ /

<
$+
+)
/!5

/ #7+777<
)

/ # :777<
)! / <
<
/

)!
/

"02- $/ $ )

<

)
<
#$0%
)

"$%, PL
TAX AUDIT
Authors Note
x We have experienced from our interaction with the students that they find this chapter difficult One of
the reason we found out was students find the answers in this chapter very lengthy and difficult to
understand. So to deal with it we have done certain changes in the answer such as changing the flow and
style of presentation of the answers .Some answers have also been summarized where we thought was
required ,so that it becomes easy for the students to read and understand the topic .
x GST audit - PARAM covers those question which are asked by ICAI in EXAMS, RTP, MTP, SM, PM. It has
question on GST audit too which were issued by ICAI . ICAI collection is most important and that itself
is huge, so we didn’t include new questions from our side we may issue new questions in future.

CNO Applicability (Multiple Items Adjustment, Numerical, N14R, S17M, P17M, M18R)/ (M15E, S17M, P17M)/
526.0 Concession Ltd) (N13E,S17M,P17M,M18M,M19M)
Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded the turnover
of ` 1.13 crore during the financial year 2017-18 before adjusting the following:
Discount allowed in the Sales Invoice ` 8,20,000
Cash discount (other than allowed in
Cash memo/ sales invoice) ` 9,20,000
Trade discount ` 2,90,000
Commission on Sales ` 6,00,000
Sales Return (F.Y. 2016-17) ` 1,60,000
Sale of Investment ` 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax audit
under the relevant Act and guide the company whether the provisions relating to tax audit applies.
OR
Comment with respect to computation of total sales, turnover or gross receipts in business exceeding the
prescribed limit under Section 44 AB of Income Tax Act, 1961.
(i) Discount allowed in the sales invoice
(ii) Cash discount
(iii) Price of goods returned related to earlier year
(iv) Sale proceeds of fixed assets.
OR
Mr. A engaged in business as a sole proprietor presented the following information to you for the FY 16-17.
Turnover made during the year ` 124 lacs. Goods returned in respect of sales made during FY 14-15 is ` 20 lacs
not included in the above. Cash discount allowed to his customers ` 1 lac for prompt payment. Special rebate
allowed to customer in the nature of trade discount ` 5 lacs. Kindly advise him whether he has to get his
accounts audited u/s 44AB of the Income Tax Act, 1961.

>>.0,
'.
PL

¾ .
>>.0
'
PL + $/
'

) )) '

>>.0 ,
'.
+PL $!
!/) +
+ $/

5
0'
\

+ /
'
\ :7 % .g 67M !
$!
jj+j $jj/
j .
$
/$/

+ $/

"$%, P
Part III – Case Discussion & Conclusion
Particulars Amount Amount Treatment

$ 8
8% $
1
$
M67% M67% )
<.

-
P67% " )
$+

/
/

6P7% 6P7% 1
5

" 1
5 ,

- L% 1
5

" 1
5 ,

# 2g L7% L7% )1
$
67L !<

,$ LL7% ,
<,
%
" )
<,*$
$ 7787
$ $ -
'

)
'

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'.
+PL+ $
'
)
!
) '

CNO Applicability (Non-Resident) (M15R, N16M, P17M, N17M)
528.0
Liquim Ltd., a non-resident company, is engaged in the business of extraction of mineral oils having
turnover of Rs. 20 lakhs during the financial year 2015-16. The company claims that its profits and gains
chargeable to tax under the head "Profits and gains of business or profession" is lower than the deemed
income chargeable under section 44BB of the Income Tax Act, 1961. Therefore, it decided to get its
accounts audited under section 44AB of the Income tax Act, 1961. As a tax auditor, how would you report
under Form 3CD?

>>.0,
'.
PL

>>00,
'.
PL
-M628-1
¾ As per income tax Act 1961
'
! /
5
0,<;

,4#;:7%
,
$)!
>>.1>>.1.

MO<LO:7O3

)
'
,
$)!
>>.&+>>00+>>000

40

¾ Reporting Requirement under Clause (8) and (12) of Form 3CD:
Clause (8) of Form 3CD,
$

>>.0

)

>>.0)!$
>>.&+
>>00>>000
Clause (12) of Form 3CD+
, 3
! /) $)+
'
5
$
>>.1+ >>.&+ >>.2+ >>0+ >>00+ >>00.+ >>000+
- R,,4+2
! $

"$%, PM
¾ In the given case,

!
// )'

$ # 67 % +
! /

>>.0 ,
'.
+PL

*$+
)
$ >>00 3
!
/

>>00 .
+ +
! /

¾ .

+ $' /$)$+
' to mention clause (c) of section 44AB under clause
(8) of Form 3CD.
, )$+ ' to indicate under Clause (12) of Form 3CD+
/
<) 3.

CNO Ceiling Limit (N16E,N19E)
529.0
A member of the institute shall not accept in a year more than the specified number of tax audits under
section 44AB of the Income Tax Act.
Mr. Gaurav is a partner in M/s. XYZ & Co., a firm of Chartered Accountants with 6 partners. During the
assessment year 2015-16, Mr. Gaurav alone had signed 290 tax audit reports consisting of both corporate
and non-corporate assesses.

>>.0,
'.
PL
-
4677M
¾ Ceiling limit of tax audit
-/ -.L7-
4677M
,
-.2
x L7'")
x '. -v ///

¾ As per Institute on Tax Audit Assignments+

' !)/)! !

+$
/ ' )
-.I

)C
///

$!/ '
4$ <Rgx3-+- .
L

1/ !67:L+4$/6P7 '
/
)

L <Rgx3-+- .
+
' 2L7 ' / RL _8L7
+ L

$!/8L7 '
' 8L7 ' / !))!
2
+
$!/8L7 '
/:
//! '
¾ Assumption
4$/6P7 ' )/ //
' <>>.0 78L76P7
*
+4$ ) / !

$ )
' ) '
8L7
Author’s Note:
x CEILING LIMIT OF TAX AUDIT
"$%, PP
o -/ -.L7-
4677M
o ,
-.2L7'")
o ,
! '
L7 -.
o
/)
o -x
o . <>>.&<>>.1<>>.1.)'

2-
>>003>>000 '
)/
o !
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o -
)

o 0
*)

o )
)

CNO Certification Vs Reporting (P17M)

530.0
State with reasons whether an auditor conducting tax audit ‘certifies’ or ‘reports’ on information
contained in the statement of particulars attached to the tax audit report under Section 44AB of Income-
tax Act, 1961

>>.0,
'.
PL
¾
>>.0 ,
'.
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)
First part Second part
# /$ , F.'G )'

)!/$ ,

$(Form 3CA -3CB)

'

. (Form 3CD)
“Certificate vs Report”
Certificate Report
F

G F G

$

!
' /

¾
! %/+$// /

+
)

/ ' Q
G

+
$ /
'

))/ !
))%

!
(Examples of Some clauses in Form 3CD where is judgment is applied and opinion is given)
¾ 2
+->/ $
/
%-M /

+ $
'
C/ /$/
$

¾ ") )
2"8-1!

)! + !$$

%/
//

)%
) '

C/
!

) 3

¾ +
) )

/ ' + F G

+ 3

' '
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'.
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CNO Matters tax auditor should consider to while (N19E)
530.50 furnishing the particulars in Form No, 3C
Mr. PK is conducting the Tax audit under section 44 AB of the Income Tax Act, 1961 of MG Ltd. for the year
ended 31st March, 2019. There is a difference of opinion between Mr. PK and the Management in respect
"$%, 77
of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. PK has to report whether the
statement of particulars in Form 3CD are true and correct and the same is to be annexed to the report in
Form No. 3CA. Advise on the matters to be considered by Mr. PK while furnishing the particulars in Form
No. 3CD.
Answer ¾ While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor to
consider the following:
,

<'
$

+
) % % )

, !
'

! 2"8-1+ ' ) $
$ ) ' ! %

,!

2"8-1
)+

)
,
/

+% $
)
$ !+$ / ! $)
)/
!
,

)
/$
' $

/$ / !

+ ,

+
!

, )

$ + ' $ )
$ ))!
2 " 8-1 ) ) )%
+
+

+ ' $) '
'
,
C

+ !

)$
82"8-.
: $2"8-0+

!)
Author’s Note
It is a hint answer. Students are advised to also refer the ICAI suggested answers.

CNO Cl 4--Service Tax Default (M15R, M16E, P17M, N17R)
531.0
As a tax auditor, how would you report on the following situations?
Mr. Deepesh, is a renowned criminal lawyer, practising in Meerut. During the previous year, he collected
service tax of 25 lakhs but utilized it for his personal use. The Commissioner of Central Excise issued a show
cause notice to him as to why the tax, collected by him, is not deposited to the government account. He
appeared before the Commissioner and stated his inability to pay the sum due to financial crisis. The
proceedings are still pending before the Commissioner.
->28-1
. .:M7
¾ 1 ! $
' $ ! - !+
- - &'

! '
/ // ) * '

/$
'/ '
¾ Reporting Requirement
Part A of Form No. 3CD
# /$

"$%, 7
Under Clause (4) of Part A:
,
) !
'%'
!+$
'+ '+

!+
+ ' #/ " !

" +!

/ ) / 5

#$ ,

'
0< < #/ <
"
$

/ ,

#/
<) )
¾ As per SA-580
2 + % $ . /:M7F(
# G
¾ 1 !*

$
'6:%) J
)

.
/ /) -
¾ Assumed by institute while answering:
* '
/$
'/ '
¾ ,
!
'
) )
) / +
!

' 1 '#/"-> 2
8-1+
1
$
' )
CNO Cl 11--Stock Register Not Maintained (N09E, N11R, M13R, S17M, P17M)
532.0
ABC Printing Press, a proprietary concern, made a turnover of above ` 1.03 crore for the year ended
31.03.2018. The Management explained its auditor Mr. Z, that it undertakes different job work orders
from customers. The raw materials required for every job are dissimilar. It purchases the raw materials as
per specification/ requirements of each customer, and there is hardly any balance of raw materials
remaining in the stock, except pending work-in-progress at the year end. Because of variety and
complexity of materials, it is rather impossible to maintain a stock-register. Give your comments.
-8:)28-1
-)28-1
¾ ' /$ )! ! $ C)
%!)$

But the auditor needs to verify:

C)
$+

C) !
!+ !J%+

, )+ !
!
$/

¾ Reporting Requirement
Under the clause 35(b) and clause 11(b) of Form 3CD:
.
!
8:)
)28-1)

%
)%
/
%/ * $!

/
% +% //

+
)

¾ "

%/ $ !
' !
¾ ,
! +

!

%/ )! !

"$%, 76
CNO Cl 13--Method of Accounting (M07E, M09R, S17M, P17M)
534.0
Write a short note on - Method of accounting in Form No. 3CD of Tax Audit.
-82"8-1
,-1

>:
Method of accounting in Form No. 3CD of Tax Audit:

¾ Clause 13 of Form No. 3CD ' 5
Method of Accounting:
x
/ ! $!

x ( )!
/
/ !

/!
x , )!
/
/ !+

1
/
&
3 )
ICDS:
x ( !C 3+
! ,-1
x ,!C 3
! ,-1
4$1

/

>: $
/)

*!)!
> .

CNO Cl 14--Change in Method of Stock Valuation (P17M, N17M, M17R)
535.0
A leading manufacturing concern valued its inventory following a method not in line with the provisions of
Income Computation and Disclosure Standard (ICDS) – 2 ‘Valuation of Inventories’.
In such a situation, discuss the relevant clause of Form No. 3CD under which the tax auditor is required to
report?
-82"8-1
,-1 ,,9 ,$
Clause 13 of Form No. 3CD ' 5
( !C 3+
! ,-1
,!C 3
! ,-1
4$1
C
¾ Details of such adjustments are to be given as follows:
,
1
"

# # #
,-1 ,, 9 ,$

¾ Furthermore, Clause 13 also requires the tax auditor for disclosure of the following as per
ICDS:
,-1 ,,9 ,$

¾ ,$ !$/ ,-1
¾
,$ !$/ ,-1 auditor shall
"$%, 78
Report for Adjustment ) 3
!/ ,-1 /

C
2 + ' disclose F9 ,$ ,-1 ,,G

¾ Reporting for Adjustment to be made in the P&L for complying with ICDSs:
- 2 " 8-1 ' ' !
C )
!/ $

>:6 ,
'.
+PL
2 + ' -8+ -8)$
$ /$
C 5
,
1
"

# # #
,-1 , .
/

,-1 ,, 9 ,$
,-1 ,,, -
-

,-1 ,9 #$#
/
,-1 9 /)2'.
,-1 9, -/2/&'
/
#
,-1 9,, 4$ 4
,-1 9,,,

,-1 ,R 0/-
,-1 R $+- /
) - /
.

¾ Furthermore, Clause 13(f) also requires the tax auditor for disclosure of the following as
per ICDS:
,-1 ,.
/

,-1 ,,9 ,$
,-1 ,,,-
-

$ ,-1 ,9#$#
/
$ ,-1 9/)2'.
$ ,-1 9,,4$ 4
$ ,-1 ,R0/-
$ ,-1 R$+- / ) - / . G
CNO Cl 14--Change in Method of Stock Valuation (M09R, M11R, M13R, P17M)

535.01
A leading jewellery merchant used to value his inventory at cost on LIFO basis However, for the current
year, in view of requirements of AS 2, he changed over to FIFO method of valuation The difference in value
of stock amounted to Rs 55 lakhs which is higher than that under the previous method In such a situation,
what are the reporting Responsibilities of a Tax Auditor under Section 44AB of Income-tax Act, 1961
OR
T Ltd's previous year ended on 31st March 2012 T Ltd had changed the method of determination of cost
formula for the purpose of stock valuation from FIFO basis to Weighted Average Cost basis, but that was
also not reflected in clause 14 of Form 3CD which requires reporting on change in accounting method
employed. Comment.
Answer ¾ Reporting for change in the method of valuation of stock:

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Authors Note
In clause 13 — method of accounting means only 2 things Accrual Vs Cash, if there is change from accrual
to cash or vice versa then only clause 13 will be applicable.
now clause 14 is specifically for inventory valuation as per section 145A —
it says that method of valuation should be consistent, it should be same as regularly followed. change is
allowed if its justified.
here when we talk about method of valuation for inventory, which includes accounting principles (cost or
NPV whichever is lower) as well as method of their application (FIFO / weighted average)
now in this case change to comply with AS-2 is justified, so no contravention of Sec 145A which asks for
consistency so no reporting under clause 14

CNO Cl 16--Escalation Claim (M11E, N12M, N13R, N16R, P17M, M19M)
536.0
While conducting the tax audit of A & Co. you observed that it made an escalation claim to one of its
customers, but which was not accounted as income. What is your reporting responsibility?
-L28-1
¾ Clause 16 of Form 3CD:
If !escalation claim accepted/ $!
amount

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+ the fact should be reported by the tax auditor.
However, the system of accounting followed shall also be considered.
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CNO Cl 16--Examples of Capital Receipts Which may not be Credited to P&L (P17M, N16M, N15E, M13E,
537.00 M19E)
While writing the audit program for tax audit in respect of A Ltd., you wish to include possible instances
of capital receipt if not credited to Profit & Loss Account which needs to be reported under clause 16(e) of
form 3CD. Please elucidate possible instances.
OR
T Ltd's previous year ended on 31st March 2012 During that period it made a claim for refund of customs
duty which was admitted as due by the customs authorities during April 2012 T Ltd neither credited the
claim in the profit and loss account nor reported the same in clause 16 of Form 3CD for the reason that
this has been admitted as due by the authorities only in the next financial year
-L28-1
¾ , !

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Guidance for reporting capital receipts:-

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+

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Following is an illustrative list of capital receipts which, if not credited to P&l, are to be
stated under clause 16 of Form 3CD-
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For e.g.- Capital Investment Subsidy Scheme
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Authors Note
Refund of Customs Duty not credited to Profit & Loss A/c is also required to reported under Clause 16
(b) of Form 3CD
CNO Cl 17--Difference in Sale Price and Stamp Duty (M15R, M16R, P17M, M17M,N19E)
539.0 Value
As a tax auditor, how would you report on the following situations?
M/s. N.S. Enterprises, a manufacturing concern, sold a house property in Mumbai for a consideration of `
48 lakh, to Mr. Gunaj on 1.8.2015. M/s. N. S. Enterprises had purchased the house property in the year
2013 for ` 40 lakh. The stamp duty value on the date of transfer, i.e., 1.8.2015, is ` 85 lakh for the house
property.
-28-1
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Provisions and Explanations:

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(Amendment-With effect from 1/4/19- however difference will be taxed only if stamp act value
exceeds 105% of consideration. E.g. if Consideration is 100 and Stamp Act value is 103 then
difference will not be taxable5

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Authors Note
The answer speaks about the amendment that has taken place in section 50C and 43CA of the Income Tax
Act 1961 , but it is to be noted that such amendment even though introduced by Finance Act 18 is applicable
from 1-4-19 .
No change has been made in the Form 3 CD yet, it may be done later to match up with the section 50C and
43 CA.
For Exam -If any question specifies the transaction date after 1/4/19 then only this amendment shall be
applicable.
CNO Cl 19--Scientific Research Asset (M09R, N12E, P17M)

540.0
As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you report
on the following:
Capital expenditure incurred for scientific research assets

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CNO Cl 21--Cash Payment Exceeding Prescribed Limit (N14E, P17M)
542.0 (Hotel Payments)
XYZ Ltd. pays ` 90000 for its 6 employees to a Hotel as boarding and lodging expenses of such employees
for a conference. The Company pays the amount in cash to the Hotel. The Hotel gives 6 bills each
amounting to ` 15000. The Company contends that each bill is within the limit, so there is no violation of
the provisions of the Income Tax Act, 1961. As the tax auditor, how would you deal with the matter in
your tax audit report for the Assessment Year 2015-16?

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¾ Section 44AB of the Income Tax Act, 1961
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CNO Cl 21--Cash Payment Exceeding Prescribed Limit (N15R, N16M, P17M, M18M, N18E)
543.0 (Transporter)
Ploy Ltd., engaged in the leasing of goods carriage, appointed you as the tax auditor for the financial year
2017-18. How would you deal with the following payments relating to the leasing transactions in your tax
audit report?
(i) Payments of 6 invoices of ` 5,000 each made in cash to Mr. X on 4th July, 2017.
(ii) Payments of 2 invoices of ` 18,000 each made in cash to Mr. Y on 5th July, 2017 and 6th July, 2017
respectively.
(iii) Payment of ` 40,000 made in cash to Mr. Z on 7th July, 2017 against an invoice for expenses booked
in 2016-17.

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¾ Clause 21(d)(A) and 21(d)(B) of Form 3CD

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CNO Cl 21--Entrance fees paid to Clubs (N11E, N12E, M12R, P17M)
544.0
As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you report
on the following:
Expenditure incurred at clubs.
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CNO Cl 21--No Bank Account Facility (N10E, N12R, N12M, M14R, P17M, N18M)
545.0
Mr. R, the Tax Auditor finds that some payments inadmissible under Section 40A(3) were made and
advised the client to report the same in form 3CD. The client contends that cash payments were made
since the other parties insisted upon the same and did not have Bank Accounts. Comment.

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CNO Cl 23--Rent paid to Brother (N08R, N11E, N12R, N14R, M16M, P17M, N17E)
546.0
The assesse has paid rent of ` 5 lakhs for premises to his brother.
-6828-1

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¾ Clause 23 of Form 3CD & Section 40A(2)(b) of the Income Tax Act, 1961
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¾ Beside above following shall also be taken into consideration:

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CNO Report under clause 26(A) and 26(B) in reference of (N19R, N19M)
546.10 section 43 B
"You are doing Tax Audit of Private Limited Company for the financial year ending 31st March, 2019. During
audit, you notice that the company is not regular in deposit of VAT/GST and there remains pendency every
year. The details of VAT/GST payable are:
(i) GST payable as on 31/03/2018 of FY 2017-18 was ` 200 Lakh and out of which ` 100 Lakh was paid on
15/09/2018 and ` 50 Lakh on 30/03/2019 and balance of ` 50 Lakh paid on 16/09/2019.
"$%,
(ii) GST payable of current financial year 2018-19 was ` 100 lakh and out of this, ` 40 Lakh was paid on
25/05/2018 and balance of ` 60 Lakh remained unpaid till the due date of return.
The date of Tax Audit report and due date of return was 30th September.
Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit Report under Section
43B(a)?"
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CNO Report under clause 27(b) of 3CD (N19E)

546.50
How will you verify the Income & Expenditure of earlier years credited/debited in current year for
reporting under clause 27(b) of 3CD while carrying out Tax Audit u/s 44AB of the Income Tax Act, 1961 ?
Answer ¾ Expenditure/Income of Earlier Years Debited/ Credited in Current Year [Clause 27(b)]
.%

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Author’s Note
x It is a hint answer. Students are advised to also refer the ICAI suggested answers.
CNO Cl 29B --Shares Received 1,000 (M16E, S17M, P17M, M18M, N18E)
547.0
ABC Pvt. Ltd. and XYZ Pvt. Ltd. are the companies in which public are not substantially interested. During
the previous year 2018-19, ABC Pvt. Ltd. received some property, being shares of XYZ Pvt. Ltd., the details
of which are provided below:
No. of Shares: 1,000
Aggregate fair market value of shares: ` 75,000
Consideration value: Nil
The management of the company contends that the shares need not to be furnished in Form No. 3CD. As
the tax auditor of ABC Pvt. Ltd., how would you deal with the matter?
OR
While doing Tax Audit, under section 44AB of the Income Tax Act, 1961, of the accounts of Glue Private
Limited for the Assessment Year 2018-19, it was found that during the Financial Year 2017-18, Glue Private
Limited had received 9,000 shares, the market value of which was Rs 90,000 on the date of transfer, at a
price of Rs 45,000 from Stick Private Limited. The Management of Glue Private Limited maintained that
the transaction was as per the terms of negotiations and there would be no cause for the Auditor to bring
this matter in his Tax Audit Report-Comment.
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Author’s Notes:
Clause 28 was relevant till 1st April 2017, now such cases are covered in Clause 29B
CNO Cl 29--Shares Issued 1,00,000 (M16R , P17M, N18M)

548.0
AB Ltd. is a company in which public are not substantially interested. During the previous year 2014-15,
the company issued shares to residents of India and provides you the following data related to such issue:
No. of shares issued 1,00,000
Face Value ` 10 per share
Fair Market Value (FMV) ` 60 per share
Consideration received ` 80 per share
The management of the company contends that, it is a normal issue of shares, thus, needs not to be
reported. As the tax auditor of AB Ltd., how would you deal with the matter in your tax audit report?
-6P28-1

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CNO Cl 31--Theory of Cl 31 (N11E, M16M, P17M, N17E)
549.0
As an auditor appointed under section 44AB of the Income Tax Act, 1961, how would you verify and report
on the following:
The assesse has borrowed ` 50 lakhs from various persons-partly in cash and partly by account payee
cheque.
-828-1
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CNO Cl 32--Speculation Loss (M15R, P17M, M18E)

550.0
SL Pvt. Ltd. is a company engaged in the production of wool. Along with its production business, the
company is also engaged in buying and selling of securities with the expectation of a favourable price
change. It reports the following data for the current financial year:
S. No. Particulars Amount (in `)
1 Paid up Share Capital 100 lakhs
2 Capital Reserve 33 lakhs
3 Capital Redemption Reserve 45 lakhs
4 Revaluation Reserve 32 lakhs
5 Speculation Loss on account of 12 lakhs
Purchase and
Sales of Securities
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CNO Cl 37--Cost Audit Report Consists Disqualifications (N15R, P17M, N17R, N18M)
553.0
Beam Ltd., having principal place of business in Gujarat, is engaged in the generation,
transmission, distribution and supply of electricity throughout the India. The management of the company
came to know that the provisions related to maintenance of cost records and cost audit are applicable to
the company. The company, therefore, appointed a cost auditor for the financial year 2016-17. The cost
auditor reported certain disqualifications in Form CRA-3 of the cost audit report to which the management
of the company disagreed. The management of Beam Ltd. ingeniously instructed its tax auditor not to
reveal any of the disqualifications related to the cost audit while filling particulars to be furnished in Form
No. 3CD contending that the disqualifications are not relevant and there is no correlation between tax
audit and cost audit as well.
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CNO No. Cl 40--Accounting Ratios (Short Note) (N05E, N07E, M13M, P17M, P17M)
554.0
As a tax auditor, which are the accounting ratios required to be mentioned in the report i n case of
manufacturing entities? Explain in detail any one of the above ratios and how does it help the tax auditor
in his analytical review.
Answer Answer
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CNO Cl 41--Demand Order (M15R, P17M)
555.0
Saurabh International Ltd. (SIL) was engaged in providing certain services on which it did not pay any
service tax. As per SIL, said services were not liable to service tax. However, Department issued a show
cause notice to SIL demanding service tax along with interest worth ` 5,45,000 on the same and such
demand was also confirmed. An appeal was filed to the Commissioner of Central Excise (Appeals) which
passed an order which upheld the demand on SIL. SIL, being aggrieved by the order of the Commissioner
of Central Excise (Appeals), decided to file an appeal to the CESTAT against such order. SIL has also
"$%,
requested the tax auditor not to report as those services were not liable for service tax and it has also filed
an appeal for the same.
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¾ Clause 41 of Form 3CD
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CNO Disqualification (M16R)

556.0
Circumstances in which Chartered Accountant in practice or firm of Chartered Accountants cannot conduct
Tax Audit u/s 44 AB of the Income Tax Act, 1961 of the concern.
Answer ¾ Individual
.*DDD

¾ HUF
2!)*A2DDD

¾ AOP
).DDD

¾ Trust /Insititution
. <2< ) - ) '
/#:7+777< /DDD
, <*A2+ )*A2DDD

¾ Firm
DDD

¾ Company
( !
>8{

¾ All Assesses (Other than Company)

(
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! !! !# $' #
+77+777
DDD,
/# $
|0!$* *# $

CNO ICDS & AS (M18E)/ (M09E, N13R, N16R, P17M)

557.01
ABC Ltd. is consistently following Accounting Standards as required under section 133 of the Companies
Act, 2013. During your fax audit under section 44AB of the Income Tax Act, 1961, the Board of Directors
informed you that profits of the Company is properly arrived at and the Accounting Standards applicable
to it have been followed consistently and as such, there need not be any adjustments to be made as per
Income Computation and Disclosure Standards notified under section 145 of Income Tax Act, 1961. Based
on the requirements of Law in this regard, examine the validity of the stand of Management in this regard.
OR
Discuss briefly Income Computation and Disclosure Standards (ICDS) to be followed by assessee under the
Income-tax Law.
-8 8-1
¾ As per Clause 13 of the form 3CD assesse shall disclose
( !adjustment )
!/
$ income computation and disclosure standards

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(f)Disclosure ,-1 5

¾ Income Computation and Disclosure Standards (ICDS):

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Asection 145(1),

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GF,

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Section 145(2) - 4$ !

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+

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>:6+

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)!(other than an individual or a HUF who is not required to get his accounts
of one previous year audited in accordance with the provisions of section 44(AB)),
following the mercantile system of accounting+

/)
' F /) GF
,

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F /) GF,

G

)%

,
conflict between the provisions of the Income-tax Act, 1961 and the notified
ICDSs+ $ .
$ '
- 4$
)7,
- 1

,-1 5
See List Given Above.
Conclusion
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Authors Note
xClause 13 of form 3CD has not been inserted by the institute in this answer but since clause 13 of
form 3CD is the clause that speaks about ICDS we have included it in the answer.
AC!$/
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(%)/

% R$% 2) C% F'. F/
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x First table comes under sub clause (e) where we have to explain impact on profits because of ICDS
and next table comes under sub clause (f) which give disclosures . Yes, 2 clauses are missing in 2nd
table, department has done same in original form 3CD also, may be because they don’t need
disclosure on them.

CNO Applicability of Revision of Audit (N08E, N13R, S17M, P17M, N18R, N19R)
558.01
You are doing the tax audit of a Limited Company. After submission of Tax Audit Report, management
notices that there was apparent mistake of law and due to this mistake, revised the final accounts. As a
tax auditor, company seeks your opinion whether the tax audit can also be revised or not.
OR
State whether a Tax audit report can be revised and if so state those circumstances.
Answer ¾ Revision of Tax Audit Report:
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CNO Applicability of SAs & GNs in Tax Audit (N18M)
558.02
The Statutory Auditor of P Ltd. is also appointed to undertake its Tax Audit. After the completion of
Statutory Audit, he finalizes Tax Audit without referring to Standards on Auditing and Guidance Notes of
Institute as he is of the opinion that Tax Audit relates only to tax matters with which the Income tax
department is concerned. Moreover, the assesse furnishes to the auditor only the requisite information
and records for the purpose of Tax Audit.
Answer ¾ ,
+ ' '

/$ $
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CNO Special Audit (GST) (S17M)
559.0
Briefly discuss the provisions given under section 66 regarding Special Audit required under CGST Act.

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¾ Use of Expert in Delivery Justice
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¾ Audit Under Sec 66

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¾ Prior Approval of Commissioner
. - ) -

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, !/ ' / )

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¾ Expenses for Examination and Remuneration for Audit:
' '
/ !) will be
determined and borne by the Commissioner.
¾ Auditor cannot raise demand for TAX

.

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¾ Best Audit Practices

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(Risk Based Audit)
/J software to aid the GST audit

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Ratio analysis
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(Evaluation of Internal Control System)
evaluation of the internal control $J$J 4
)

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maintenance of record, stock and fixed assets.
x Information System Audit report and the internal audit report.
x , - questionnaire designed for GST compliance

(Overall Agreement of Books & Returns)

reconciliation of the books of account or reports from the ERP’s to the return
$
¾ Special Issues
(Incomes not covered by GST)
$ gross trial balance for detecting any incomes being set off with
expenses.

(Reverse Charge)
#$purchases/expenses to examine applicability of reverse charge
)
/<$
/'
/ /

)
!
!/ liability of import of services.

(Misuse of Exempt Transactions)

Quantitative reconciliation of stock transfer within the State or for supplies to job
workers under exemption.

CNO Tax Audit of Co-Operative (N09E, N11R, M13R, S17M,P17M, N17E)
560.0
A Co-operative society having receipts over ` 2 crores has appointed Mr. D as the statutory auditor - Mr. D
is eligible to do the same under the state Co-operative Societies Act. Mr. D is not a chartered accountant.
Mr. D is also appointed to conduct the tax audit of the society under section 44 AB of the Income Tax Act,
1961. Comment

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CNO Tax Audit of Public Charitable Trust (N08R, M09E,N10R, M16R, S17M, P17M)
561.0
Draft an Audit programme for conducting the audit of a Public Trust registered under section 12A of the
Income-tax Act, 1961.
Answer .

%//
)
+ /
5
¾ -
% books of account and other records $/ regard to the system of accounting and
internal control
¾ Vouch the transactions !
all incomes $)properly accounted ) !

/)! =

all expenses and outgoings / $)recorded )
!
/)! =

x
falls within the ambit of the trust=
x
!authorized by the trustees or other delegated authority
!) )=
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covered by the
objects of the trust

/$/
x ) trial balance
/
)!
x ) Balance Sheet and Profit & Loss Account of the trust authenticated by
the trustees

% )

!
/

CNO Tax Audit Report When Stat Audit is not Complete (M17E)
562.0
M/s. SB & Co. has been appointed as tax auditor under section 44 AB of Income Tax Act, 1961 by Woodcraft
Interior Consultants, a professional partnership firm, having turnover 1.25 Crores. M/s. RS & Co. are the
statutory auditors of the firm, but they are unable to give their report on the financial statements of the
firm. M/s. SB & Co., have, however, completed their tax audit and want to issue their reports. Comment.

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2"8-.<2"8-0<2"8-1
Tax Audit Report:
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+Form No. 3CA;

¾

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+Form No. 3CB

2 +

)/$in Form No. 3CD
2 " 8-. '

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CNO Types of GST Audit (M18R, M18M, N18R)
563.0
Vijay Maniyar & Associates, a firm of Chartered Accountants, is of the view that under GST law, audit can
only be undertaken by the Departmental officers and there is no scope of audit under said law for the
Chartered Accountants. You are required to advise Vijay Maniyar & Associates on the same.
Answer ¾ Types of Audit under GST Law by Chartered Accountants5- 9C!!3
.
+ - .

4 $/ ! . )!
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Sec 35
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Sec 66
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Audit under Sec 35

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Applicability of Audit & Qualifications

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Submission of Audited Annual Accounts & Reconciliation

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Use of Expert in Delivery Justice

.$/ $
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Audit Under Sec 66

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Reason for Such Audit

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Prior Approval of Commissioner
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Auditor Nominated by Commissioner

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CNO GSTR 9C- verify ‘Unbilled transactions at the beginning of the financial year (M19E)
563.10
As the auditor appointed under the GST Act, 2017, how would you verify ‘Unbilled transactions at the
beginning of the financial year?

Answer ¾ Verification of Unbilled revenue at the beginning of Financial Year:

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CNO GSTR 9C- Foreign exchange fluctuation (M19R, M19E)

563.20
While conducting GST audit of PQR Ltd, you have observed the following:
PQR Limited has exported goods to a Company located in USA. The value of goods is $100,000. The
exchange rate on the date of filing Shipping Bill is: CBEC notified Rs. 65 and RBI Reference rate Rs. 68.
At the time of receiving money, the bank exchanged the foreign currency at Rs. 70.
How would you report the adjustments in turnover due to foreign exchange fluctuations in
Reconciliation statement in Form GSTR 9C prescribed in terms of Rule 80(3) of CGST Rules, 2017?
Answer ¾ Reporting of Adjustment in Turnover due to Foreign Exchange Fluctuations in Reconciliation
Statement:
.!
) $ .# 4 #P $
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)
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/

2 4 # + '
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LM+77+777difference in revenue being Rs 300,000 would have to be reduced
. $
$ $ 4 #P
. !+
)%

$
)/#7K#LM_#6'}77+777= Rs 200,000 would be credited to the Profit and Loss
Account as Forex Gainwhich again needs to be reduced from . $

$ $ 4 #P
CNO Turnover before GST Case, invoice raise afterward (M19R)

563.25
Services were provided during the period June 2017. The service was completed on 20.6.2017, but invoice
for the service was raised only on 1.8.2017.
Answer
$
!!+$
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z67 $ #8 -' #

) $
'+ ) 4
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.
+ / $
/ 4 /+ $$
)

. z67
CNO Reverse Charge(advocate) (M19R)

563.30
Please state which of the following are liable to reverse charge
(a) GTA issued a consignment note on 1.1.18. The consignment notes charges GST @ 12%. The consignor
has booked the GTA. The recipient has paid the freight to GTA on ‘to collect’ basis. Would this turnover be
mentioned in Table 7D?
(b) GTA issued a consignment note on 1.1.18. The consignment note does not charges GST. The consignor
has booked the GTA. The recipient has paid the freight to GTA on ‘to collect’ basis. Would this turnover be
mentioned in Table 7D?
(c) Advocate Mr. X has provided legal service and charged GST of ` 18 on his invoice of ` 100. The advocate’s
client has paid 118 to the advocate. The advocate has remitted ` 18 to government and is of the opinion
that the aforesaid transaction should not be reduced in Table 7D. Is the stand taken by the advocate
correct?
Answer -/
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/
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"$%, 6M
CNO Reverse Charge (Telecom) (M19R)
563.31
In terms of Sl. No. 5G of Form GSTR 9C, the turnovers included in the audited financial statement for the
period April 2017 to June 2017 shall be declared and deducted from the annual turnover to arrive at the
turnover as per the GST Laws.
Please specify which of the following supplies would form part of reporting under turnover for the period
April 2017 to June 2017
(a) Goods were manufactured and cleared from a factory on 1.6.2017 on sale or approval basis. The goods
were not approved by the recipient and returned back on 25.12.2017.
(b) Goods were manufactured and cleared from a factory located in Bangalore on 30.4.2017. The goods
were cleared to its showroom located in Hyderabad and eventually been sold from there on 30.8.2017.
The audit under the GST Law will be conducted for Bangalore GSTIN.
(c) Continuous supply of service in the nature of telecommunication service has been provided for the
period 1.6.2017 to 30.6.2017. The bill is raised on 3.7.2017. The bill is payable by the customer only on
21.7.2017. Should the revenue be recognised in the month of June 2017 and reduced from total turnover
or should it form part of turnover for the period July 2017 to March 2018 since the due date for payment
of consideration is 21.7.2017. The entity recognised the revenue in the month of June 2017.
Answer (a)
/ $ L +
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$

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(c) . $ # 8) - ' #+ 67+ '
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67
CNO Turnover before GST Case, partial payment afterwards (M19R)

563.40
Service has been provided in the month of May 17 amounting to ` 1,00,000/-. Invoice has been raised
within 30 days. There was a deficiency in the provision of service. The customer has paid only `
20,000/-. The company has issued credit note amounting to ` 80,000/- on 31.3.2018 and closed the
customer’s account. Should any amount be reduced for the period April 2017 to June 2017. Are any
adjustments required to be made for the period July 2017 to March 2018?
. >66) 4 .
+

+
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.
67 z67+ /$
#+77+777< !67$
'
#+77+777< !67
CNO Turnover before GST Case, Sales on Approval & Others (M19R)
563.50
In terms of Sl. No. 5G of Form GSTR 9C, the turnovers included in the audited financial statement for the
period April 2017 to June 2017 shall be declared and deducted from the annual turnover to arrive at the
turnover as per the GST Laws.
Please specify which of the following supplies would form part of reporting under turnover for the period
April 2017 to June 2017
(a) Goods were manufactured and cleared from a factory on 1.6.2017 on sale or approval basis. The goods
were not approved by the recipient and returned back on 25.12.2017.
(b) Goods were manufactured and cleared from a factory located in Bangalore on 30.4.2017. The goods
were cleared to its showroom located in Hyderabad and eventually been sold from there on 30.8.2017.
The audit under the GST Law will be conducted for Bangalore GSTIN.
(c) Continuous supply of service in the nature of telecommunication service has been provided for the
period 1.6.2017 to 30.6.2017. The bill is raised on 3.7.2017. The bill is payable by the customer only on
21.7.2017. Should the revenue be recognised in the month of June 2017 and reduced from total turnover
or should it form part of turnover for the period July 2017 to March 2018 since the due date for payment
of consideration is 21.7.2017. The entity recognised the revenue in the month of June 2017.
Answer (a)
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)
$
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6 $
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(c) . $ # 8) - ' #+ 67+ '
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67

"$%, 87
COST AUDIT (OLD ONLY)

CNO Cost Audit (N14E, P17M)

564.0
Write a short note on Cost Audit.
Answer ¾ Meaning and Functions of Cost Audit:
.
/ , - / .
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%

/ - +

+
5
verification

/

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+

+
+

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examination
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¾ Section 148 of the Companies Act, 2013
.
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$
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)+
direct that particulars relating to the utilisation of material or labour or to other items of cost as
may be prescribed shall also be included in the books of account kept by that class of companies
, $ - 4$ +)/

!

/
.
+
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)

.

¾ Appointment/Qualification & disqualifications
The audit shall be conducted by a Cost Accountant in Practice who shall be appointed by the Board
of such remuneration as may be determined by the members in such manner as may be
prescribed
"
8P
! )

/

/

!

/
The qualifications, disqualifications, rights, duties and obligations applicable to auditors under
Chapter X of the Companies Act, 2013 shall, so far as may be applicable, apply to a cost auditor
appointed under this section ) !
! /$

/

!
¾ Cost audit report
, $

)) )!

01

!
A company shall within thirty days from the date of receipt of a copy of the cost audit report
prepared (in pursuance of a direction issued by Central Government) -
4$
/ ' $!$

CNO Purpose (M10E, M12M, P17M, M18E, N18M)
565.0
What is the purpose served by Introduction of Cost audit?
OR
Besides statutory cost audit, circumstances that may warrant cost audit. statutory cost
Answer ¾ Meaning and Functions of Cost Audit:
.
/ , - / .
&/+

$

%

/ - + +

5
verification

/

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examination
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¾ Purpose of Cost Audit – To give VIP T2reatment should be adjusted to lower cost

$ )! $
>M - .

!

5
V-Cost variation within the industry – (

$/
!
!+
!)
!

I-Inefficient management - (
!
!

!+

!)
!, !)
! 4$
) %$! (Some Factories are higher cost of production)
P-Price fixation - '

+ % +

! ) knowing the true cost of
production.
T-Tax-assessment - ( ! '$
)

+
$!/ !%

(Excise in Captive Consumption)
T-Trade disputes - - ! ) / )

//+)+

Author’s Note
1. Purpose of Cost Audit – To give VIP T2reatment should be adjusted to lower cost
V-Cost variation within the industry/ I-Inefficient management/ P-Price fixation/ T-Tax-
assessment/ T-Trade dispute
2. “Headings in Comics font” are the headings and examples included by author for helping the
students to understand and remember the answer
audit, circumstances that may warrant cost audit
CNO Advantages (N04E, N08R, N10R, M10E, M13R, M16M, M16E,
566.0 P17M, N17R, N17M, M17M, M18M,M19R, N18M)
You are appointed as cost auditor of Bird Cement Limited Briefly explain the advantages that accrue
because of a Cost audit
Answer ¾ Advantages that accrue because of Cost audit: - . )$ / %
/
To Society –
x -
fixation of prices
'
)

/
$'
x
price increase )! C

+ /
%
)

$/
To Government –
(Related to Public)
x - ' ceiling prices

/

%
(Related to Industry)
x - ) /$
inefficient units.
x - ) /$
$ /$/ protection to certain
industries.
x -
/

healthy competition /
$ !

%
(Related to Contracts)
x ( 4$

+
/$ '
price of the contract )$
x -
trade disputes)/ /$

"$%, 86
To Shareholder –
x -
%

'
/+
, % $
/
$ % /) a
fair return on their investment
To Management -
(Opening)
x ! budgetary control and standard costing)/ !

(During the Year)
x / / reliable data ! ! %
'/+
+

%/+

x .

% wastages ) % / !
/ /
x Inefficiencies %/
!))/ /

$

x Management by exception )
) /
)
$/
x , detection of errors and fraud.

(End of the Year)

x . )

% valuation of closing inventory % /
)
)
Author’s Note
Answer has been rearranged to create a flow , italics are the headings included by author for
helping the students to understand and remember the answer
CNO Advantages (Objectives of cost audit on behalf of (N18R)

566.01 management)
XYZ Ltd is engaged in the manufacturing of various products in its factories spread across northern states
of India. It seeks your advice about cost audit. Senior partner Mr A holds a meeting and addresses as under:
Cost audit is basically carried out at the instance of the management for obvious advantages. The principal
object of this audit is to see that the cost data placed before the management are verified and reliable and
they are prepared in such detail as will serve the purpose of the management in taking appropriate
decisions. Explain stating clearly the objectives of cost audit on behalf of management.
Answer ¾ - )
!

/ )$$ /.
+

)C

) / $)
!
$ / %/

)C
$

& )/

!
/ +' +
+

/

+

&/ )C
$

/ )/

$ /

+// +!

.
/)// $
+'

)
/
1

)

)
& )/ $ ) $)!$

!
/
$
$!'
2'

!
/

)/
+

, $/ !

/ ! )! ) / )$
//

Author’s Note
It will be fine if we explain definition of cost audit and advantages to management from cost audit as
explained in 566
"$%, 88
CNO Cost Audit Programme (N05E, N09R, N11R, N12R, N13R, M16R, P17M,
569.0 N17R)
“Like every other audit, a systematic planning for cost audit is also necessary”. Indicate the matters to be
included in a Cost Audit Programme.
Answer ¾ Matters to be included in Cost Audit Programme:
, %! !
/

!
+
/
)

/ $
% )+
) )! ) ! %
*$+ %/ )

' + !

- + )
$+)

)0)$

$$
!)
/

Preliminaries:
x Identify the objectives and purposes
)

$
/ !(Cost Reliability Vs Cost Control Vs Reduction)
x 1

) $ !
/ (One factory or all, one product or all)
x ) !
/

E.g. list of costing books and ledgers maintained, number of products, processes, raw
materials and its use.
Matters to be included in the Cost Audit Programme may be divided into following two
stages

x Review of cost accounting records

5
o Method of costingbatch, process or unit.
o accounting for raw materials; stores and spares+ /+ /+
1
$+
(Eg FIFO / Weighted)
o ! recording wages, salaries, overtime + /+

o 0allocation of overheads

) )!

$
I'
o interest, recording of royalties+
$ ' +

o accounting of depreciation
o stock-taking and its valuation including inventory policies.
o ! budgetary control
o ! internal auditing.
x Verification of cost statements and other data:
$
5
o Licensed+

o

o -
+ / + + +
$ $

o .)
/

o
o -
o #

)%
o 2

))/
/
!

/+/

+ )
$

/

) %
/
Author’s Note
Answer has been rearranged to create a flow , “Headings in Comics font” are the examples
included by author for helping the students to understand and remember the answer

"$%, 8>
CNO Reconciliation (N08R, N10R, N10E,M14R,P17M)/ (P17M)
570.0
Write a short note on - Reconciliation of cost and financial accounts.
OR
For what purposes the Cost Auditor refers to financial records while conducting Cost Audit of an entity?
Answer ¾ Objectives of cost audit and how to achieve it?
.
! '
!

/
/$ $

,$/ +

+

$ !+
!
+ $
+! !

! +)
+

¾ Why we reconcile cost and financial accounts?
Requirement in cost audit reports annexures
.'

/
!+ + + + / +

+ /
, )$

)

)%+
' !
$

Cost statements are to contain a summary of all expenditure

2

!'
)!

!
' ) )
$ = $
'
)
$
$)!
$

$" !
)!

/

Cost Statement covers data from Schedule III
A ,,
,,, - .
+678+

)
! )
$

+

% +

<$
+
/ $
/+ % /+

%

Errors, mistakes and manipulation

.
)

! / ! + %

!)

)//

!'$
) / + $

CNO True & Fair (N08R, N10R,M11R, N13R, N16M, P17M,N18E,

572.0 N13R)
Write a short note on - True and Fair Cost of Production.
OR
“A cost auditor checks the cost accounting records to verify that the cost statements are properly drawn
up as per the records and that they present a true and fair view of the cost of production and marketing
of various products dealt with by the undertaking”. Comment
Answer ¾ True and Fair Cost of Production:
.

%

/
to verify that the cost statements are properly
drawn up as per the records and that they present a true and fair view of the cost of production
and marketing of various products dealt with by the undertaking
¾ The Companies (cost records and audit) Rules, 2014-
//

)

)%
+
) !
+

"$%, 8:

)
//

/

$) !% /$ $

<
.
¾ Section 143(12) of the Companies Act, 2013 and the relevant rules -
1 ! !
/

>M .

,!
+ -"%
'

0
%/+ !) / $
/

5
Materiality
1
/ generally accepted cost accounting principles
Consistency in the application
/!

/

Application
/!

cost records and preparation of cost statements
)
$/
)

& material prior-period adjustments
Abnormal wastes and losses
)/ /

Author’s Note
Answer has been rearranged to create a flow by author for helping the students to understand
and remember the answer
CNO Related Party (N16E)

573.0
Write a short note on Records to be maintained for Related party Transactions in terms of Cost Audit.
Answer ¾ Records to be maintained for Related Party Transactions in terms of Cost Audit:
,
!
$
)!
!

! Q ! I $
$+
) /

+/ /

(Æ consultancy servicesÆ capital goodsÆ plant facilitiesÆ raw materialsÆ production of goods
or rendering of servicesÆ other services)

$+

+/! consultancy services;

capital goods
/
!=
plant facilities

%=

raw materials,/+/$
+

C
/
/
=
! ! production of goods or rendering of services

! !other services=
Author’s Note
Answer has been rearranged to create a flow , “Headings in Comics font” are included by author
for helping the students to understand and remember the answer

"$%, 8L
AUDIT OF PSU
CNO Powers of C&AG (N07E, N11E, N12E, N13R, M15R, M16R, N16M,
597.0 S17M, P17M, M18R)
Being an expert in the field of government audit, you are required to briefly explain the powers of
Comptroller and Auditor General of India with respect to supplementary audit and test audit as stated
under section 143(6) and 143(7) of the Companies Act, 2013.
OR
Enumerate the right of C&AG of India to conduct a supplementary audit of the financial statement of a
company, or comment upon or supplement audit report provided under section 143(6) of the Companies
Act, 2013.
Answer ¾ Powers of Comptroller and Auditor-General of India.
Supplementary audit under section 143(6)(a) of the Companies Act, 20135
- . 4, L7!

$/

!

!)!
! J )=

+ ) !
+ +
+)!
+

+ - . 4,!

Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013:
.!
/$)! - . 4, +
+ ) )!
! $!

)

8L .
$!
)
!+ $! ) ! )
)!
!+
) +)/
)
) / /
!

Test audit under section 143(7) of the Companies Act, 20135( C

$ / + - . 4,
!+
!
!
$)
:)

8P
.
+

!+)!+
)

! $
P. -
. 4N1 +- $
.
+P+ !

CNO Comprehensive Audit (M09R, N10R, N11R, N12R, N14R, M14R,

599.0 N15R, M16M, N16R, P17M, N17R, M17M, M18M,
N18R, N18E, M19R, N19M)
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.
OR
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 the broad areas to be
examined in comprehensive audit.
OR
XYZ & Co., a CA. firm was appointed by C&AG to conduct comprehensive audit of ABC Public undertaking.
C&AG advised to cover areas such as investment decisions, project formulation, organisational
effectiveness, capacity utilisation, management of equipment, plant and machinery, production
"$%, 8
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.
Answer ¾ - . 4 / $/
)

%/ *

!

!)
$ )! $

)!
*
%' $/
/ I

¾
$
$ !$! /
+ )C
$ *$+ /+
$
$
+ C
+/J
$+

!
+ / +
!+

+
+
$ !)+

!+

+ / +

+)/ !
! +

¾ Areas to be covered:

$
$ !$! /
+ )C
$ '

$ 5
#
$ /
C
/
! C

- $

C
$

.

)
${ * )
J

!
{
-

+ /

+

A +
$
+ J $
J

&
$

!

¾

!
$ )

)

%!

=/ I

)

$ )C
$
$ )
$ )

)C
$)C
$$! .
!
)/ '
)C
$

$)$
CNO Performance Audit Planning (M14E, S17M, P17M, N17R, M18M)

599.20
ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance audit of a Sugar
Industry. List out the factors to be considered generally by ABG & Co., while planning a performance audit
of Sugar Industry?
Answer ¾ 2
)
/
. 5
(Information)
) /understanding of the program )
Legal and regulatory
/ controls.

(Strategy)
, !/
/
previous audits

)C
$
, !/ criteria $ )C

/

needs of potential users

"$%, 8M
(Plan)
Potential sources of data
) $

$ !
) !
$/sufficient staff and other resources
/written audit plan.
CNO Performance Audit (M16R, M16E, N17R, M18R, N18R, N18E)

600.0
“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, program, activity, or
function in order to provide information to improve public accountability and facilitate decision-making
by parties with responsibility to oversee or initiate corrective action.” Briefly discuss the issues addressed
by Performance Audits conducted in accordance with the guidelines issued by C&AG.
OR
Write short notes on Issues addressed in Performance Audit of PSUs?
Answer .
/ /)! -3.4+

. ! 5

¾ Economy-
, minimising the cost of resources
$ !+ $/ /
!+ ! )

z//
! /
/+

!/ /$
$)

!
+ ! ! )

¾ Efficiency-
, input-output ratio.,
)
/+

!
$
' + !/$ ! !

. /

!)

5
x procurement practices=
x
!protected and maintained=
x )

/+
$
! managed,
regulated, organised and executed
x
operating procedure=
x optimum amount of resources + +

/$/ ! !/$

!=+

efficiently used=
x )C
$ )

/ cost-effectively

¾ Effectiveness-
, '
)C
$
$ )

$ !

, /
$+
!+
5
x compliance with laws and regulations
) /=
x objectives of and the means $/+
+

// )

/ proper, consistent, suitable or
relevant to the policy=
x identify factors inhibiting satisfactory performance or goal-fulfilment=
x
! management control system /+ /
/ /I
$=

x '

/
$ desired level of program
results=
x ) $
)$

social
and economic impacts
!
!
=

x
$ /<$ /components=

"$%, 8P
x /
alternatives
!/
/ / !
$!
=
x !ways of making programmes work more effectively
x /
+
+$

other related programmes=
Author’s Note
There is controversy in this question — Answer provided as per May 16 RTP / Nov 18 RTP / Nov 18 exams
differ from each other, I think answer of Nov 18 RTP is best and recent, answer for Nov 18 Exams is too
short Above is the answer as per Nov 18 RTP which should be followed.

CNO Efficiency Audit (M18E)
600.01
In carrying out efficiency audit of a Public Sector Undertaking (PSU ), what important aspects are required
to be looked into, to assess the efficiency ?
Answer ¾ Efficiency Audit
, )
$ 'J
+ J!/$ ! !
&'/

!)

5
x

=(Good Quality)
x
!
=
x +

!=(Well Trained)
x
+ +

/$/ ! !/$

!=(Minimum without compromising results)
x )

/+
$
! /+
/ +/J'
=(Overall)
x
/
=(Process)
x )C
$ )

/

$!

CNO Propriety Audit (P17M, N18M)
601.
Write a short note on - Propriety Audit.
Answer ¾ Meaning: - !. $

K
)
,
-!

-

¾ Emphasis/Scope:,

+$
$
+
)

%

+ )
$ '

+ !

! '
$

)/

!+
/ )

!

, $!

'
$/

'
)
!+
!
'

' !

¾ Principles:
!
+
! ' +

/

5
' not prima facie more x (E.g.-Car of 1 crore for MPs)
than the occasion demand and
$!
'
same degree of
vigilance in respect of expenditure as a person of
"$%, >7
ordinary prudence would exercise in respect of x (E.g. 50 cars were ordered without
his own money; quotations)
! '
x (E.g. Cars were used by government

/ '
employees or given for rent)
will not directly or indirectly accrue to its own
advantage;
J benefit of a x (E.g. Benefit was given only to
particular person or group of persons ruling parties)
+ / x (E.g. Bribes were paid to
+ $% indirectly government employees)
benefit the management personnel, employees

and others.
CNO Propriety Audit (General Principles) (N08E, M08R, M11R, M11E, M12R, S17M, P17M)
602.0
What are the principals involved regarding “Propriety audit’ in the case of Public Sector Undertaking?
Answer ¾ Principles: -
!
+
! ' +

/

5
' not prima facie more than the occasion demands(E.g. Car of 1
crore for MPs) $!
'
same degree of vigilance in respect of
expenditure as a person of ordinary prudence would exercise in respect of his own
money; (E.g. 50 cars were ordered without quotations)
! '

/'

will not directly or indirectly accrue to its own advantage; (E.g. Cars were used by
government employees or given for rent)
J benefit of a particular person or group of persons
(E.g. Benefit was given only to ruling parties)
+ / + $ %
indirectly benefit the management personnel, employees and others. (E.g. Bribes were
paid to government employees)
CNO Propriety Audit (Company Act) (M04E, N12E, M12R, M15R, N16M, S17M, P17M,
603.0 M18E, M19M, N19R)
Write a short explanatory note on – Areas of propriety audit under Section 143(1) of the Companies Act,
2013
Answer ¾ Areas of propriety audit under Section 143(1):

>8 - .
+ 678 % !

, + ' !/

$

)!
! )
! $ )
!

!$) C

! )=

!
!)!)%
C

!= ./+
/ ! +
J/
$
/$)!
!=

! )/$
!)%/
!+

!
+)

$)

!
)!
!=
$
)!
!$) =
' $)
/ $
=
)%

! !$)

+

!)
$

+

!)
$+
)%
)

+/ /.
)
"$%, >
$!

2 +

$+ )%

CNO C&AG (Audit Report) (N17E, M19E)
604.0
Contents of audit report given by Comptroller & Auditor-General of India.
Answer ¾ Contents of Audit Report of the Comptroller and Auditor General:
2
!
+ - . 4
)

%/ - 4$
$
/ /5
x Introduction
/ / $ %/ 4$
- +14$ - -
x # comprehensive appraisals
%/

)! Audit
Board
x # company auditor’s reports ) )!

)! -.4

4$

-
x /
%/not taken up for appraisal by the Audit
Board.
2

+ - . 4)

/ + <A
/ +

+

)

<
$

/ +
' + !

)! ! +

4$

/
$ %/ 4$

CNO Role of Financial Committee (N18M)
604.01
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,
philosopher and guide' of the Committees. In view of above, you are required to list down any four roles.
Answer ¾ - 3 . 4 , ! %!
/

/ *
)
/JN+
/N -
* # /! ) - N %/+ / !

'/ )/ # =
*
J
) -
-

%

) -

/ =
2
- # < /
)$

$ < 1 4$
-
% )!
-

/!
- .

% #
</ =
,
. # +

)
)! - +
) 1 < !

# < /

. # %/ !)! 4$ +$
) )! -

"$%, >6
M&O AUDIT
CNO Management Audit Programme (M07E, N12M, M12R, M13R, P17M)

608.0
K Ltd. requires you to organize a Management audit program. Briefly state a plan of action.
Answer ¾ Devising a statement policy: -
,
/
!!
$
+)C
$+
! /

(E.g.- Causes of falling sales & how to increase them)

¾ Location of audit function within the organization: -

/ )
!
(E.g.-Below directors)

¾ Allocation of personnel: -

/
$ '

$
/J
(E.g.-from various regions & departments)

¾ Staff training programme: -

, $ +
/)
/
(E.g.-5 days training)

¾ Time and other aspects: -

.
)/$ 3
$$

/
(E.g.-total duration 3 months)

¾ Frequency of audit: -

) )
/ !

/
(E.g.-Once in 2-3 years)
CNO MAQ (N08R, P17M, N18M, N18E)

609.0
What are the Management Audit Questionnaires? Give a sample questionnaire for Audit of Inventory.
Answer ¾ Introduction: -
./

/ /

/ I %!
)!/

¾ Objectives: -
- $ -
$ examination of an organization’s /
/ %
Appraisals of management actions
/ /J )C

$
*// Weakness and Deficiencies /J
#$/
/+/J/+
/+
/
&$
$
%/

/ /J

)C
$

¾ Working: -
)/ Fg& +"".G
Fg& G

!
/

)+ '

Q"I

)
' /

))/

%
".

"$%, >8

¾ Importance: -
, !$/ !J
=) + )
/ !
/ /J

CNO Summary Written Report (M13R, S17M, P17M)
610.0
Write a short note on - Summary Written Report.
Answer ¾ % ! /
//
/ 4!

)!
/
NN)+ /
$ /
/
,

)
/ !
/ $$
)/ /

$!)
$! //

!
01
$/
$
/ / )

))/

CNO Behavioural Aspects (M04E, N11R, N16R, N16M P17M, M18E, M19R)
611.0
The “management audit‟ concern with the whole field of activities of the concern, from top to bottom,
starting, as always where management control is concerned because we are primarily concerned with
whether the general management is functioning smoothly and satisfactorily.
Briefly explain the behavioural aspects encountered in the management audit and state the ways to solve
them.
OR
Explain in brief the behavioural aspects encountered in the management audit and state the ways to solve
them.
Answer ¾ Causes: -
Staff/Line conflict: -
x / + )

x / !
' ! ! %

!
x
)$/+ ! $
!
x
$

Control: -
/ '
$
$
+

$
!

) /

=
x 2

/$ /
x 2
/ ! ! %/ ) )

/ /

x $
)! )!

x * !

¾ Solution to behavioural problems: -

1 $ / $ protective and
constructive benefit.
1 )C
$ $ $ maximum service in all feasible
managerial dimensions.
"$%, >>
$ minimum interference with regular operations
/
Involve the responsible officers ) % ! $ !
$/
)! !
- trust and friendliness.
CNO Hostile Management (N07E, N09R, N10E, N12R, N13R, M16R, P17M,
612.0 M18R, M18R)
DLF Ltd., a manufacturing unit does not accept the recommendations for improvements made by the
Operational Auditor. Suggest an alternative way to tackle the hostile management
Answer ¾ Audit Findings
(

/

!/
$
) /$//

¾ Cold war
//
$ ! )
)!

/
!)
) /
$!

¾ Participative Approach

,

$ / $ % !
$

$ 0!
/ $
/ + )

$

¾ Benefit of Participative Approach

$

/ $ !
% /

$(
$

/)
+/ ! /$
/ $ /
!
$
/

!)/
(
)
) !! //
$ % $ / $
!
/

*
+ . 12
/ )$
$

% / 12
CNO Operational Audit (Objectives) (N05E, N06E, M09R, M11E,P17M, M18E)

614.0
Briefly explain the objectives and scope of Operational Audit.
Answer ¾ Appraisal of organizational structure: -
, $ / /J
+

! / )C
$ )

/ ) ! !
(Packing Department / Dispatch Department / Delivery Department)
¾ Appraisal of controls: -
/

(System to track delivery of goods ordered online)

¾ Appraisal of objectives and plans: -

,
+ )
!

! //+)
/ $

effectiveness, efficiency and economy
)/

(Comparison with what others do, what we promised, cost involved)
"$%, >:
¾ Evaluation of performance: -
, %
$ + $!
$) !
)

)'

)
%/!
$

) /$
(How many parcels returned, average delivery time to various regions)
CNO Appraisal of Organisational Structure (N18M, N18E)

614.01
Internal auditor makes an appraisal of organization structure to ensure that it is in harmony with the
objectives of the entity, besides checking of financial transactions and operational activities of the entity-
Elaborate.
OR
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.
Answer ¾ Review of the Organisation Structure –
Introduction, Harmony between Structure & Objectives

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What to evaluate?
2 5
x * $ manner in which the activities of the enterprise are
grouped for managerial control , $
) ! !! / /
x examine the organization chart

simple and economical and that no function enjoys an undue
dominance over the others.
x *
! responsibilities of managerial staff at
headquarters do not overlap with those of chief executives at operating units
*' satisfactory balance ) !
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x ' reasonableness of the span of control
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x ( dual responsibilities cannot be avoided, the primary one should be
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%

x 2!+ $ process of managerial development
$
//
CNO Operational Audit (Types) (N17E)

615.0
What are the types of Operational Audits?
Answer ¾ Type of Operational Audits: There are three broad categories of operational auditors:
2
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CNO Shortcomings of traditional sources (N19R)

615.05
Perfect Steel Ltd. has reported a higher turnover of ` 560 crores in the year 2018-19 as compared to earlier
years but its sales return has also increased to 10% from only 4% upto the last year. The management is
concerned about the high sales returns and feels a need to get the operational audit done for sales and
production department of the company. The company is also having an internal audit system in the
company. Elaborate the possible reason/s, why management is getting operational audit done when
internal audit has already been done for both the departments by stating the shortcomings of
conventional information sources.
Answer ¾ Why Operational Audit:
Inadequacy of Traditional Sources
x -$
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+ +

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annual audited accounts
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o Example:-
Sales may be shown at a higher monetary value compared to the previous
year and this may apparently suggest that the functioning of the sales
department is satisfactory. But this may have been caused by a number of
factors inspite of a really bad performance on the sales front. This fact may
not be readily known unless one cares to analyse the sales data by
reference to notes and explanations to the accounts and other related
accounting data. Even a study of this nature may not fully reveal the
weakness. It is quite possible that the established market for sales has been
lost partly while some fortuitous sales have compensated the loss.
o Example:-
The routine weekly production report may include production ‘that is
subsequently rejected by the quality control staff, or to avoid showing a
bad production performance; even the partly produced goods may also be
included. Remember, all this can happen inspite of specific management
instructions about the basis on which the production report is to be made
out.

x P. !)

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the performance reports+
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Author’s Note
A-)% B-0
PROMPT

A Annual audited accounts/B- Biased $ <P-Preoccupied/R-
) relied / O -
Occasional

< M- echanical/ P 4
$ performance reports/T-
Transmitting
CNO Types of Audit & Differences (M08E, M12E, P17M, N17E, M17M, N18R,N19R)
617.01
Many modern enterprises have become huge and sophisticated. This has resulted in decentralisation of
their activities and different type of audits. You are required to explain the difference to the management:
(a) Internal & Operational Audit.
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(b) Management Audit & Operational Audit.
(c) Financial Audit & Operational Audit.
OR
Financial vs. Operational Audit
OR
The main objective of operational auditing is to verify the fulfilment of plans, and sound business
requirements while in financial auditing, the concentration is more in the financial and accounting areas
to ensure that possibilities of loss, wastage and fraud are minimized or removed. Analyze and Explain
stating clearly major differences between Financial and Operational Auditing.
OR
Operational auditing is not different from internal auditing” Discuss
Answer (a)Difference between Internal & Operational Audit: ))!! )

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For example - when the auditor looks into the vouchers to see whether they corroborate the entries
in the cash book or physically examines the cash in hand he is doing his traditional protective
function. The moment be concerns himself to see whether customers’ complaints are duly attended
to or whether cash balance is excessive to the need, he comes to the operational field.
Also, he will review the operational control on cash to determine whether maximum possible
protection has been given to cash. Similarly, in the audit of stocks, he would be interested in such
matters as reorder policy, obsolescence policy and the overall inventory management policy. In pure
administrative areas on stock, he will see whether adequate security and insurance arrangements
exist for protection of stocks.

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For Example: The standards relating to objectives for a government company are quite different
from those of a private sector company. Similarly, standards of performance of a well-equipped
company which also adequately looks after the well-being of employees may be significantly
different from a company which offers scanty welfare facilities or is ill-equipped.
Today, however, the CNO of modern internal auditing suggests that there is no difference in internal
and operational auditing. In fact, the scope of internal auditing is broad enough to embrace the areas
covered by operational auditing as well. The modern internal auditing performs both protective as
well as constructive functions.

(b) Difference between Management Audit & Operational Audit

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management”.
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CNO Internal Audit Report (M19E)

618.00
Webcam Ltd, a public company with a paid-up share capital of Rs. 20 crores have a turnover for the
financial year 2018-19 of T 220 crores. X, a recently qualified Chartered Accountant, has been appointed
for conducting internal audit. He seeks your advice in drafting a good quality internal audit report. Please
guide him by elaborating (in brief) the essential features of a good internal audit report.
Answer ¾ Essential Features of a Good Internal Audit Report5

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CNO Attrition Rate (M13E, N16R, M16M, P17M, N17R, N17M, N18M)
619.0
The Managing Director of Beta Ltd is concerned about high employee attrition rate in his company. As the
internal auditor of the company he requests you to analyse the causes for the same. What factors would
you consider in such analysis?
Answer ¾
)/ ! 5
(Safety)
!
(Office is at remote location, prone to thefts)
(Timings)
z) 3%)
(12 hours of work&3 hours of travel, 6 hours of sleep, 2
hours of routine work, 1 hour for family)
(Trainings & Work Culture)
1 /J $
/ ! %
% $ )

{ (Outdated work culture,
Using Type Writer)
(Seniors)
( /J !'
$
$%{(Inexperienced seniors & HRs)
A)))$ (Shouting & Abusing)
"$%, :
(Collegues)
, ) ! $%
I'
$ {(Excess
Staffing or Understaffing leading to strain on few)

(Salary & Schemes)

!) (Salary 30-40% lower than market)

%)
(No Development & Encouragement)
Author’s Note
Answer has been rearranged to create a flow , “Headings in Comics font” are included by author
for helping the students to understand and remember the answer
CNO Decreasing Operating Efficiency N18E

619.01
The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in 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.
Answer ¾ Decreasing Operating Efficiency in Material Consumption:
, input-output ratio,
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%analytical procedure

current year as well as previous years.
production process, scheduling, machine usage, material mix)
internal control system)
budget, standard costing and other MIS reports)

. reconciliation of variation $
K
+ !

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$discussions/ inquiry
!

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Internal audit report) /! ! /+

)%
key material)
% ! /+
++
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CNO Error of 1000 (M14E, M15R, P17M, M18M)

620.0
Mr. 'P' has been appointed as operational auditor of M/s Books & Magazine Ltd. And observed a totalling
error in invoice of ` 1,000. He has not taken care of the same saying that this is out of scope of his work.
Comment.
Answer ¾ Future Oriented and Recommendatory
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¾ Definition of Operational Audit

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CNO Working Capital Crunch (N04E,N08R,N10R,N12R,M14R,M16R,M16R)

621.0
You have been appointed as management auditor of a large engineering company suffering from a
working capital crunch. Enlist and discuss the related areas which you would probe into to overcome the
company’s problem.
Answer ¾ Action Plan to Overcome Working Capital Crunch:. %/

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Working Capital Estimation:
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CNO Internal Audit Functions (N18R)

621.01
The internal auditor must be regarded as part of the management and not merely as an assistant thereto.
He must have authority to investigate from the financial angles every phase of the organisational activity
under any circumstances. Explain.
Answer ¾ )
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* $ ! $ /
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Accountable directly to the Board and Major Responsibilities

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Main Responsibility -Maintain Internal Control and Provide adequate safeguard
* ) !+$+ ) !
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Operate Independently
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How Internal auditor can be helpful to Management?
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DUE DILIGENCE
CNO DD (Areas) (M08E, M13M, M15E, P17M)

622.0
Areas in which due diligence can take place.
Answer ¾ Areas in which Due Diligence can take place –

Legal due diligence:!)/

/ !
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!)! !

$ ! $
Commercial/operational due diligence5 , /! )!

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Personnel due diligence:,

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Tax Due diligence5, /
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Information systems due diligence:,
!
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CNO Financial Due Diligence (S17M,N17E)/(M04E,M11R,N12R,N12M,N14R,M16R,S17M,S17M,P17M)

623.0
Mr. Q is the proprietor of a very profitable business dealing in speciality chemicals. Due to his old age, Mr.
Q wants to sell his business and has approached XYZ Pvt. Ltd., a competitor, for the same. As an advisor to
XYZ Pvt. Ltd., you are appointed to do a 'Due Diligence' of the business. Enumerate the points which you
would look into as part of the Due diligence exercise.
OR
Sri Rajan is above 80 years old and wishes to sell his proprietary business of manufacture of 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.?
Answer /
%!
)
$ $5
¾ Historical Background:
)/

/
$)!%/
!
! )
%/

! / $ )/ +)$

An eye into the history of the company may reveal its turning points,
survival strategies adopted from time to time, the market share enjoyed by and changes therein,
product life cycle and adequacy of resources. ,

/

+ +!/ ! $
)

!
+ +
)+

+
+
+
$
%

¾ Financial Projections: C
next five years with detailed assumptions and
workings and the appropriateness of assumption

C
,
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+

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¾ Significant Accounting Policies:
/
)/)!
!
%!The impact of the recent changes in the accounting
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policies in the recent past keeping in view its intention of offering itself for sale.

%

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/

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+

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Finally, examine whether the financial statements of
the company have been prepared in accordance with the governing statutory requirements.
¾ Review of Financial Statements:.$ )!
!)
/!) / . Any extraordinary item of income or expense that might
have affected the operating results would require close examination.
It is advisable to compare the actual figures with the budgeted figures for the period under review
and those of the previous accounting period., / past four
to five years are compared and the trend / $ /
) )
% /
0 )$+
) / +
$

/ +
//
+
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/JThe net worth of the business has to be arrived at
by taking into account the impact of over/under valuation of assets and liabilities.

¾ Cash Flow: . $

/ /
)
!// C , %
!
)
/
$ %'

,
!

%5
(
!is able to honour its commitments !)+ )%+
/$ %=
* company able to turn its trade receivables and inventories;
* deploy its funds;
( !lying idle or is the company able to reap maximum benefits out of
the available

¾ Statutory Compliance: )' , %

) ! %

%

! ,
! )/ /

+

$
/

$ )

!=
$ /$/

¾ Human Resources:, ,

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Author’s Note
If the question asks about due diligence but it is silent on which type of due diligence then we have to
assume and write answer considering financial due diligence
CNO DD (Incoming Partner) (N10R, M14R, S17M, P17M, M18M)

625.0
What are the important steps involved while conducting Investigation on behalf of an Incoming Partner?
OR
Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1. The partners
have agreed to take Mr. Mistri as a partner with effect from 1st April 2018 as 1/4th partner.
What are the important steps involved while conducting investigation on behalf of Mr. Mistri, the
incoming partner?
Answer ¾ Purpose: -
% )$//
)+
+
) +
) ! ' / +

/+

)
) )! )
!
¾ Areas to be covered: -
.
reasons for the offer of admission )

) !
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!$
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$ Deed of partnership+
!

+

) + / / + ) + C)
+

/ +/+

&' !special clause exists
+!)
+

.
history of the firm+

/

! record of profitability I)$ ))!
. record of capital employed and the rate of return.,
! $

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. / quality of clientele )
/!'+
! /
! composition and quality of key personnel ! )! !
% $/ /J
&' asset and liability /) )
%/
I $ + $ /) % /+ % +
+
/)
/
/ ) / '

J terms of loan finance
$

.
manner of computation of goodwill +!
&' the incomplete contracts
)

)) !
CNO DD (Under / Over Valuation) (N05E, N10E, M12E, N13E, M15R, P17M, N17M,
627.0 M17R, M18E, N19R)
M Limited is going to acquire S Limited The purchase consideration has been decided at Rs 4000 Crores M
Limited is worried about hidden liabilities or overvalued assets of S Limited and approached you to
examine the same List out eight important transactions/items which you would like to investigate in the
Due Diligence exercise
"$%, :
OR
Zeta Ltd is anticipating taking over a manufacturing concern and appoints you for due diligence review
While reviewing, it requests you to look specifically for any hidden liabilities and overvalued assets State
in brief the major areas you would examine for hidden liabilities and overvalued assets
OR
Vita Ltd. is anticipating taking over a manufacturing concern and appoints you for due diligence review.
While reviewing, it requests you to look specifically for any hidden liabilities. State in brief the major areas
you would examine for hidden liabilities.
OR
K.DK Bank Ltd., received an application from a pharmaceutical company for takeover of their outstanding
term loans secured on its assets, availed from and outstanding with a nationalized 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 be your areas of analysis in order to ensure
that the assets are not stated at overvalued amounts
Answer ¾ Major Areas to Examine in Course of Due Diligence Review:
1 /
$$ '
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+
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$ ' ! +!/
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¾ Important transactions/ items which need to be investigated in the due diligence

exercise are-
Items of Hidden Liabilities:
x
!! !

$
+
/ ) !)
x
! ! $ /$ F - G )% 2

,
F/ G+ ! )

0
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Items of Over-Valued Assets:

x A

<

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x ) + $/ $ $ $ )$ "#9= /
$
%/

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x .

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x / !
x ,$

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x ,$
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<
Authors Note
Students are advices to see in the question what is asked ,whether hidden liabilities or overvalued assets
or both and then shall answer accordingly.

CNO Due Diligence Report (M07E, N08R, N15E, N16R, P17M, N17R, N18M,
628.0 M19M)
An Japanese Company engaged in the business of manufacturing and distribution of industrial gases, is
interested in acquiring a listed Indian Company having a market share of more than 65% of the industrial
gas business in India, request you to conduct a “Due Diligence” of this Indian Company and submit your
report.
As a due diligence auditor:
(a) indicate the key areas you will cover in your review.
(b) list out the contents of your Due Diligence Review Report that you will submit to your Japan based
Client.
Answer (a)Some of the significant key areas which shall be covered under the review are as under:
¾ Historical Background:
)/

/
$)!%/
!
! )
%/

! / $ )/ +)$

An eye into the history of the company may reveal its turning points,
survival strategies adopted from time to time, the market share enjoyed by and changes therein,
product life cycle and adequacy of resources. ,

/

+ +!/ ! $
)

!
+ +
)+

+
+
+
$
%

¾ Financial Projections: C
the next five years with detailed assumptions and
workings and the appropriateness of assumption

C
,
)!

!

+

$$
!

¾ Significant Accounting Policies:
/
)/)!
!
%!The impact of the recent changes in the accounting
policies in the recent past keeping in view its intention of offering itself for sale.

%

/
$ ) !

,
/

/
)!
!+

/ $ )
/

+

/
)!
! )!
/

Finally, examine whether the financial statements of
the company have been prepared in accordance with the governing statutory requirements.

¾ Review of Financial Statements5.$ )!
!)
/!) / Any extraordinary item of income or expense that might
have affected the operating results would require close examination.

It is advisable to compare the actual figures with the budgeted figures for the period under review
and those of the previous accounting period., / past
four to five years are compared and the trend / $
/ ) )
% /
0
)$+ ) / +
$

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+ //
+
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$)$) $)
/JThe net worth of the business has to
be arrived at by taking into account the impact of over/under valuation of assets and liabilities.

¾ Cash Flow:.$

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! // C , %

!)
/
$ %

' ,
!

%5
(
!is able to honor its commitments !)+ )%+
/$ %=
* company able to turn its trade receivables and inventories;
* deploy its funds=
( !are lying idle or is the company able to reap maximum benefits out of
the available

¾ Statutory Compliance: )' , %

) ! %

%

! ,
! )/ /

+

$
/

$ )

!=
$ /$/

¾ Human Resources:, ,

' + %
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)
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2+4 !+& , $) ! < !
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(b)The contents of a due diligence report can be discussed under:

(Start of the Report)
¾

$

¾ )C
$/

¾ 0 !
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//

(Legal DD Related)
¾ . ))
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$

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+

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¾ . /

(Environment DD Related)
¾ . &$ #

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¾ . /

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¾ . $
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¾ . ,
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(Conclusion Related)
¾ // $
) %
) / <

¾ 2!+'
$!!) // / /

"$%, L7
FORENSIC AUDIT (NEW COURSE)

CNO Forensic Accounting Vs Audit (S17M, M18R, M18E)

629.0
ABC Ltd. is a listed company having turnover of ` 50 crores & plans expansion by installation of new
machines at new building-having total additional project cost of ` 20 crore.
OR
Rupees (In crore) Purpose
10.0 - for Building
8.5 - for Machinery
1.5 - for Working Capital
20 crore
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. On hearing this, the management is
planning to appoint Forensic Auditor. Advise management that how is a forensic accounting analysis is
different from an audit.
OR
Explain how a Forensic Audit differs from an Assurance Engagement
OR
Forensic audit is unlike other audits Explain
Answer Difference between a forensic audit and financial audit5
Sr. Particulars Financial Audit Forensic Audit
No.
)C
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<

/

CNO Forensic Audit Steps (S17M, N18M)
630.0
Enumerate the steps to be undertaken in case of forensic audit process
OR
PQR Ltd. is a listed company having turnover of Rs. 50 crores & plans expansion by installation of new
machines at new building-having total additional project cost of Rs. 20 crore.
"$%, L
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.
On hearing this, the management is planning to appoint Forensic Auditor. Advise the Forensic Auditor
about the steps to be undertaken in case of forensic audit process.
Answer ¾ &
2
.
/ / .
/!+

)

*$+/+!2
.
//

)

Step 1. – Initialization
x Purpose
, $
!$) $+ !
/

x Meet Client
,
) /
+ !

x Conflict Check
.

%)
$ )
(Whether it will affect other assignment of firm and vice versa)

x Preliminary Investigation
,
! !$ / $

) / ) )

/

Step 2. - Develop Plan
x Set Objectives & Methodology
%
%//)! /

!/ $ / )C
$ )
$
/! ) J

Step 3. Obtain Relevant Evidence
x Economic Information / Documents / Assets / Person / Expert / Company
1 /
+ ! $$
/
+

+ +
!+ '

$

x Depends on Nature of Fraud
, / $
+ $ /

!
)
+ )

x Sufficient to Prove Identity of Fraudster / Mechanics of Fraud / Amount of Fraud / Clear

Chain of Custody / Usable in Court
"$%, L6
$
)
! $ ! +

+
,
$ / / %

/$

)

+% /

! $

,
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$ /

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),$ / )

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Step 4.- Perform the analysis

! ) / !
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/=
x / $

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=
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+ )

=
x J/
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x /
/ =

Step 5.- Reporting
,/ .

/
$ !+ ! )
'

/ / $ / +
/!$

x Sections in Report
!

/ +

$ / +
J+
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/

+

+ !+

$ , %! $ / $

$
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x Facts should be the base and not mere Opinions

$
$ /%
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/
/

Step 6. Court proceedings
$ / %! /
//
+)
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$

/ / $ / )
+ )!
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!$/ '

CNO Forensic Audit Steps (Types of Analysis) (M19E)
630.10
You have been appointed as a forensic accountant in M/s Secure Ltd .to carryout various analysis as a part
of your assignment to arrive at a % particular result. Specify the various analysis which might have to be
carried out by you to arrive at your result.
¾ Perform the analysis
The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
summarizing a large number of transactions;
"$%, L8
calculating economic damages;
performing present value calculations utilizing appropriate discount rates
performing a regression or sensitivity analysis;
utilizing a computerized application such as a spread sheet, data base or computer
model;
utilizing charts and graphics to explain the analysis.
performing a tracing of assets;

CNO Forensic Audit Techniques (S17M)
631.0
Briefly mentioned the forensic audit techniques name.
Answer (Fraud can be in any corner of financial statements)
¾ 1
/
+
!$$/
+

!) 6

(Concealed – Omission or Falsification & Collusion)
¾ 2 /!

/
"!+

/
%
!2

+
/

(

!+

%
)
$ !)

¾ 2
.
)$!
GSTD
CCD

! )5
General Audit Techniques:
x Testing defenses: ./

$
!%! /J

))! / ! % )!

! ! % % !

Generalized Audit Software (GAS): 4J. 4.
-..
% '
+!/+ +J
!
% 4.
! ' / $) !I

! )C
$4. )!/
' !I !+')!+ !
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/.

A/ 4. +

/ $ !

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! !
F( G

) $
'
/ !- !+ $4.
. -
//.-+,
$1 &'
.!,1&.

Statistical & Mathematical Techniques:
x Trend Analysis: 0 $
!

% .
' $ ) )/ !!
$ / /-$!)C
/J N

!order ! ))
$
!$ /
x Ratio Analysis: .

! %!
%
/$

!+ ! )!
!/ )!

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Technology based /Digital Forensics Techniques: &$!
$ /
!N
$
!-
! $ +
/

+ / / $
!

0 %/ +
) /

%
/$
I $ $
!1/ $ /

)

' / $ / *$+
!
/
$) !
$ /
CD should be checked by S2MELL technique
x C1$.!(Earlier each hard disk / pen drive etc. were analysed one by one, in
this approach they are analysed at the same time)
x D 2
x S

2
(Analysing change in pattern, to detect insider data theft)
x S // ! (Understanding hidden message in electronic file, images,
communication)
x M1:(Software used to investigate computers)
x E
(Software used to extract evidence from sized hard drives etc.)
x L$.!(When cyber-attack takes place)
x L/#
x
%//2
x - ! /
x 2/(To extract meaningful information form logs)

Data Mining Techniques:
,
/
!/$ +
'
1 /

/J
!51
$!+
$/1$ %!,
$
%/ + ! )
! )+ ! %/ , ' $ +

+ $
/

Computer Assisted Auditing Techniques (CAATs): -// )+
/ !%+

!
I $

/ %/
'
A-..
+ + ) .
-

-..

-..

/

/

I ! + /
Common Software Tool (CST): 1
/4. +- $)

$ % &'
+ +
+ #10 % .
+

# % -! +
' -

) ! $) !

( ! )
' !!
!$ !+ - !

( 4. - + $ )

$ / +
$ $$/

4. <-

Laboratory Analysis of Physical and Electronic Evidences5
x Computer Forensics
o -- !
o *%//
o

x E-mail analysis
o .!J3 )
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o - !J

x Protection/Validation of Evidence
o . 32
1

o !
'
o 1
/
o ,% /
o 2/ !
o 2/
o 2#&$

"$%, LL
INVESTIGATION
CNO Audit Vs Investigation (N04E, N10R, N12M,P17M, M17R, N18E, N19R)

632.0
General objective of an audit is to find out whether the financial statements show true and fair view. On
the other hand, investigation implies systematic, critical and special examination of the records of a
business for a specific purpose. In view of the above, you are required to brief out the difference between
Audit and Investigation.
Answer ¾ Auditing
, $$ '

express an
opinion $ ) ! ,
+ / $$
'
)! / !
¾ Investigation: -
, !
+

'
)specific
purpose.
'

$ / intensive as well as exhaustive

$
/

,$ /

)C
!

Basis INVESTIGATION AUDIT

¾ Objective , establishing a fact or a $!

happening or at assessing a particular display a true and fair
situation view
%/ !
¾ Legal 9 !+
! ) !-
Requirement .( 2 + $ !
¾ Who .! +! )- A Chartered Accountant
performs / .
/ -

Conducted .
.
P>P
by
¾ Scope
$ / ! )

/$ )! OR ! )
!

! % )!
$$
¾ Time Frame % )!/

(Period , !
$$!+
!+!!!!
Covered)

¾ Nature of # ! ,$$

%/
activities '
/
$

performed / C/
'
¾ Application , !
, /$ )!

of / +
) )$/+ /!

/
accounting

/$ /
!
+

principles )!

/

¾ Evidence , %

$$
. !

$
$
&$

¾ Reporting

) $ /
) & !
"
2 /!'
¾ Inherent " / .
Limitations //
"$%, L
¾ Pre- ,
// . )

Condition

$

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)C
$

CNO Embezzlement of Cash- Areas (N07E, M09R, M12M, N13E, N15R, M16M, S17M,
633.0 P17M, N17M, N18M)
In a company, it is suspected that there has been embezzlement in cash receipts. The company appoints
you as an investigator. What are the areas you would verify?
Answer ¾ Cash Receipts: -

/larger cash discount
!
,/
!

entering only a part of the
amount on the counterfoil.
.C /fictitious credit in the account of a customer $/
.C /a cash sale as a credit sale and raising a debit in the account of the customer.
( /a good debt as bad and irrecoverable
$

Short debiting the customer’s account /

!)
Under-casting the receipts -0%
Over-casting the payment side-0%
CNO Embezzlement of Cash-Steps (N13E, N15R, P17M)

633.10
A departmental store has a very large turnover in cash sales of all kinds of items such as groceries,
foodstuffs, sweets, chocolates, and other related items One day, the accountant of the store stole all the
cash receipts and cleverly misguided the management about the embezzlement The management
appointed you to investigate the suspected embezzlement of cash receipts in the departmental store What
are the steps you would take in this regard?
OR
You have been appointed to investigate a suspected embezzlement of cash receipts in a departmental
store What are the steps you would take in this regard?
Answer ¾ Investigation of Suspected Embezzlement of Cash Receipts:
(/$ /
)JJ

+
$ / /
% %)

0
/ $ /
)JJ + $ / /

'

$

= /
+

!%

$
/
!/$

/ $ $ / 4 ! $

+)
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$)! $ /

*' ) !) $)

* $ % !

/
%+!+ !' #!/ )$ !+
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$

/ + ! $)!! ! %
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$
/

$
)
+ /+
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+ $

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-)

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!

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0!
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!)

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+

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+ 4$ )'/
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-)$
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)

%

=

)$

. )%)

%)!

/ )%
)%
CNO Fraud (Supplier Ledger) (N08E, M11E, N16M, P17M,N19E)

635.0
Write a short note on Frauds through supplier ledger.
Answer ¾ Supplier Ledger: -
Suppressing the Credit Notes )! /
/

)!
Accepting purchase invoices at prices considerably higher %

/ '
+
+
.C / fictitious or duplicate invoices

) ! / !

$

Withdrawing amounts unclaimed by suppliers+ )!/
$)
CNO Higher Sales & Declining Profits (M06E, N11R, N13R, M16R, N16M, P17M, M17M)
636.0
Element Pvt. Ltd. engaged in manufacturing of chemicals is consistently recording higher sales turnover,
but declining net profits since the last 4 years. As an investigator appointed to find out the reasons for the
same, what are the points you would verify?
Answer ¾ Decline in Net Profits despite Increasing Sales:.
)
!
/ $+)
/ , !) )
// $ / 5
Unfavourable Sales mix: (
!

/+
'9 </$
/ , $'+ )

+ )

Negative Impact of Financial Leverage:(
! $

!) /) ! +
)
/. $
+/)
/

Other Items Included in Sales:/
!

$+/+/ +'
!+ '+

'
! /
)! !

)!
!<$
High Administrative and Selling Expenses:. $/
/!

'
/!

*$+

)
$
$$ /

Cost-Price Relationship:,

) )

)!
/

/

/ , !+
/

"$%, LP
$
+ $
)

$
)!

Competitive Price:($)

% + )
/
Additions to Fixed Assets: ( $! '

/ ! + !)

CNO Investigate Frauds of Inventory defalcation (M19R, N19M,N19E)

637.01
Mr Sharma 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 expense vouchers.
Mr. Sharma is evaluating options for verifying the process to reveal fraud and the corrective action to be
taken in such cases. As an expert, you are required to brief Mr. Sharma about the inventory fraud and
verification procedure with respect to defalcation of inventory?
Answer ¾ Inventory frauds ,$ ! ! $ )

/

& !! !$/
/!)

)! / //+

,$ !
!) )! !$

)% !
$

¾ Verification Procedure for Defalcation of inventory, !) /

%+ +

/ + !
)
$

!) )! !
!$/ +
$ )

! ) /
/)
+
+ !
+ /

/+
)$
% !

$) ) )
/ )
)
5
! $ !
+ '

$
$ !+
$) !

)

$ / ) $ !

)!

%/ !
! $ ! )!
,$ !0%

. +
$ !
,$ !0%)$
)!
4, #/
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$
$ !
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)
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2 +
+)
+

)%)

%
/
,$ ! 0% .+ ,$ ! 0% )

% 2!+
/)$ !
$
$ !)

)$

%/ )% )$ ,

+ +
!

/
/)$ $

1
$ !+ +
)! / +)!$ /

/
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=
$
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2
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/+ $ / /
%

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/
) , /+ /

) %

/ ' /
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'
$+ '
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!
%

!

+
$)/
CNO Investigation (Future Maintainable Turnover (M13E, M16M, S17M, P17M, M18M, M19M)
639.0
H Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future maintainable sales. As
the person entrusted to value S Ltd., what factors would you consider in assessing the future maintainable
sales?
Answer ¾ Factors to be considered in Assessing Future Maintainable Sales:
, /
) ) ) + /

) %

(Past)
Trend: ( + $ )
/
! ! $ )

/. ! )

(Present)
Political and economic considerations:.
)! 4$ %!
' % /
{(
% %!

$//

{

Competition:( %!
)

%

{
,
/

/{,
!I

)
/{

(Future)
Marketability:, ) ' % $)
!' {
)
CNO Investigation (Ownership) (N16E, M18M)

640.0
The Central Government is of the view that there are certain interested members and companies who are
financially interested in the success or failure of the company or who have been able to control or to
materially influence the policy of the company. Hence the Central Government wants to investigate the
ownership of the company. Describe the scope and extent of investigation by an Investigator/ Chartered
Accountant on behalf of Central Government under Companies Act, 2013.
Answer ¾
' $ / - .
+678K

(Extend of Enquiry & Objective of the investigation)

(

! $ / + ' !+
)C
$ $ / $ $ /

$ / )! / !
(Determination of Area of Accounts)

+ $ / /

$ / '
! )
/
!2' + /

$)
$ $ - .
+

+ + $$

)', )!

! /$ / )!
/

+
)
+ $

)$ /

(Subsidiaries & Directors)

,

!$/)

+ /

)' !$
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) / 4!+

/

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)$

/
(Materiality)
.! )
! )
) ! $ / )
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+
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+) +$ )$ / "//

)
)! !
)! .
+.
.

)! 01

(Negligence)
.!//

/ !
! /
)
$!)!+ )/ /
!+ !
!

(Interrogation)
, !)
!$ / /
+
+/ +

!0/ ) /
/

++
!+ %/

(Reporting)
, ,$ / /

! / +
)
' / A!+
!

/ /

(Opportunity to explain)

/ $ / /
! '

CNO Investigation (Sec 210) (M15R, P17M, N18R, N18M)

641.0
What will be your approach in investigation under Section 210 and 213 into the affairs of the company
registered under Companies Act, 2013?
Answer ¾ .
$ /
6768 - 5
/
$ /
6768 - .
+678

)! / /
! !

$! /
/+ +

+ $ + + /
)+
%/+
.+

%
+/ + !

F

!G

,$ /
6768
!

.
<
/ $ / 5
Clarity of Terms of Reference:

! $ /

$ /
*$+

+)/ /,!) ) !
+ )

/ , )+

/+ )
! )C
$
$ / =
$ / )
! .
$ / $ /
!)

+
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)$ / * %
)
+!+

% - 4$ /
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$ /

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Scope of Investigation:
'

)

$ / )
. /+ !)

/ !
!
*
$
%
/
$ / = )

+!+
+
! 2
$ / + !
! )%

! /$
- .

Period for investigation:
* $ / $
$ /

$

$ /
$ / + +

6768$

Framing of Programme5
' $ / <
/$ /
!
*% %/

!

$ / ) !$
/ /
+
$! +$/

//

$
+' J
*
% $

$

/$ /

Using the work of Experts:

*

' %/+!+
+

!
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Legal requirements and investigation Report:

!
$ / /
*+ $+
%
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' $0%
) %
$
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)

$ ) /

*%

$ - .
+678
/
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$//
+
+ + /

$ / //
)$
CNO Investigation of Borrower (M12R, M13R, N15R, S17M, P17M, N18R, M18M,
643.0 M18E)
A nationalised bank received an application from an export company seeking sanction of a term 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 company and submit a
confidential report based on which he will decide whether to sanction this loan or not. Decide the points
you will cover in your investigation before submitting your report to the General Manager.
Answer ¾ Purpose: -
#) /
1 /
!
.$) !
!+) !

¾ Collection of Information: -
,$ /

=
The financial standing and reputation) / !C!)!

!
"$%, 8
History of growth and development
!
/
:!
Authorization .
.
)!

)
The purpose

)proposes to invest the amount of the loan.
Schedule of repayment of loan) )! )+
!
/ )

)$) !
!)
$

¾ Examination of Financial Statements: -
2 $ $ !+ / !
$
' + / +
' !/
$!

/ ) !
¾ Computation of relevant Ratios: -
& ! 2'.
& ! /
2'.
.$/,$
0%1)
- . - )
E
%.
!J) E
%)
# - & !
¾ Break-up of annual sales: -

¾ Schedule of assets and liabilities: -
Assets: -
x '
+ $
x ' $) !
Liabilities:
x )/
x

/

CNO Examine Ad Expenditure (N13E, M16M, P17M, M18M)
644.01
Usual evidence to justify hoarding advertisement expenses.
OR
M Ltd. intends to intensify its advertisement strategy of hoarding advertisements to increase its sale
during the impending festival season. You have been appointed as the special auditor to examine the
expenditure under this head. What will be usual evidence you will look for in this case to justify the
expenditure?
Answer ¾ Hoarding Advertisement Expenses:
/) $
C ! '
- !# )! - ! J/'
&' E
$$$ //

-

$ //

0<,$
$ / /
!
/ !
$

#
)! $ //

"$%, >
CNO Special issues in investigation (N16M)
644.02
You have been appointed to investigate the accounts of a company and informed that the accounts have
already been audited. Discuss whether you can put reliance on such already audited statement of accounts
for the purpose of investigation.
Answer ¾ Whether the investigator can put reliance on the already audited statement of account: -
,

$ /
*$+ $ / )
% )$
) / !))!
/ +
$ / )

3- $0
% .
+%/$ /

/
+ / / )%

, $) $ /

+ $
+ /+

) %

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) $ / )!

+
! / /

!

% $ *$+

$ / $ )
! )!
+ %

/ $% $ / +

!/
) ! "$ +
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"$%, :
PEER REVIEW
CNO Peer Review & Its Objectives (N07E, N08E, M08R, M11R, P17M, N18E)
645.0
Explain the objectives of Peer Review.
Answer ¾ Objectives of Peer Review
) / $

!

)! , =

)
!
/

! / ! $
)!=

$ !/ !

)!

%/

CNO Focus of Peer Review (M10E, N15R, M16M, P17M, N17M, N18M)
646.0
Focus of a Peer Review.
Answer ¾ What to examine?
-

</)! -
/ article
assistants and/ or audit assistants,
/
/ + % +
! +

Training programmes for staff
/

+
/$) !

Systems and procedures
!/
$

E !reporting.
-
Technical, Professional and Ethical Standards
-
directions and / or guidelines issued by the Council )+

/ 2 )
/+ ") %+ / .

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647.0 N18M, N18E, M19M)
Areas not to be examined in Peer Review
Answer ¾ Assurance services which shall be subjected to peer review
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CNO Technical Standards (M13E, M16M, S17M, P17M, N17M, M18R,

648.0 M18M, M19R)
Technical, ethical and professional standards as per statement on peer review.
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649.0 M17M)
Collection of Evidence by Peer Reviewer.
Answer ¾ Collection of Evidence by Peer Reviewer:
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650.0
A, a practicing Chartered Accountant is appointed to conduct the peer review of another practicing unit.
What areas A should review in the assessment of independence of the practicing unit?
Answer ¾ Review in the Assessment of Independence of the Practicing Unit –
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CNO Reporting (Areas of Control) (M05E, M09E, N12M, M15R, M17R, P17M, M18M)
651.0
Areas of Control for Reporting Stage of Peer Review.
OR
Preliminary Report under Peer Review.
Answer Reporting:
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year from the date of issue of report as mentioned in (b) above. If the Board so decides, the period
of one year may be reduced but shall not be less than six months from the date of issue of the
report.
CNO Stepwise Approach / Approach of Reviewer (M15E, P17M, N18R)

653.0
Explain the stepwise approach adopted by the Peer reviewer.
Answer

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CNO Eligibility criteria (M18E, M19E)

653.01
Eligibility criteria to be a Peer Reviewer.
Answer Eligibility to be a Reviewer:
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CNO Inherent limitations of Peer Review (N18E)

653.03
What are the inherent limitations of Peer Review ?
Answer ¾ Inherent Limitations of Peer Review:
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CNO Objectives of QR (N18R, S17M)

653.04
What are the objectives of the Quality review?
Answer ¾ Evaluate Audit Quality
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CNO Scope of the Quality Review (N19R)

653.042
Scope of the Quality review.
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CNO Qualifications by QR (S17M, M18M, N18M)

653.05
Give examples of areas on which the reviewer may qualify the report
Answer ¾ A reviewer may qualify the report due to one or more of the following:
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CNO Responsibilities of QR (S17M)

653.06
What are the reporting responsibilities of the technical reviewer while carrying out a Quality review
assignment?
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CNO Stages of Quality Review (M18R)

653.07
Various Stages involved in the Conduct of the Quality Review Assignments
Answer ¾ Stages of Quality Review
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Firm to submit Representation – TR to submit Final Report – Within 45 days from Acceptance – Audit
Firm to send Submission to QRB – TR to submit final findings on reply of Audit Firm—Quality Review
Group will consider Report , Reply of audit firm and TR’s final findings and send recommendations
to Quality Review Board – QRB to consider final course of action)

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CNO Actions by QRB (S17M, M18M)
653.08
List out the consequences if the Quality review board notices major non-compliances with the
requirements of the Standards on quality control or standards on auditing or accounting standards?
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CNO Basic elements of quality review report (M18M)
653.09
Reviewers, based on the conclusions drawn from the quality review, shall issue a preliminary report and
subsequently the final report. As a quality reviewer briefly discuss the basic elements of Quality Review
Report. ?
Answer ¾ Basic Elements of the Reviewer's Report in case of Quality Review: !$

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PROFESSIONAL ETHICS

CNO Sec 2 --MCS (Portfolio Management Services) (M06E, N08R, M12M, M12R, M13R, N15E, P17M,
654.0 S17M, M18M)/ (N18R)
P, a Chartered Accountant in practice provides management consultancy and other services to his clients.
During 2015, looking to the growing needs of his clients to invest in the stock markets, he also advised
them on Portfolio Management Services whereby he managed portfolios of some of his clients.
OR
Mr. Sam, a Chartered Accountant in practice, provides guidance on post -issue activities to his clients e.g.
follow up steps which include listing of instruments, dispatch of certificates and refunds etc. with the
various agencies connected with the work. During the year 2017-18, looking to the growing needs of his
clients to invest in the stock markets, he also started advising them on Portfolio Management Services
whereby he managed portfolios of some of his clients.

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CNO Sec 2 --MCS (Recruitment Services) (N07E, M11R, M15E, P17M)

655.0
Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct training
programmes for and on behalf of a client.

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CNO Sec 2 --MCS (Advisor to issue and underwriting) (M19E)
655.05
CA Natraj, in practice, accepted an assignment as • advisor and consultant to the public issue of shares
by his client M/s Super Ltd.
Besides helping the company as an advisor, he also underwrote the public issue of the company to the
extent of 25% at a commission of 1%. Remaining shares were underwritten by banks and other financial
institutions at the same rate of commission. He contends that above assignments are part of management
consultancy work permitted by the council of the Institute. Do you agree with the view of CA Natraj ?
Decide in the light of applicable code of conduct.

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It’s a hint answer .Students are advised to also refer the suggested answer issued by ICAI

CNO Sec 6 --Certificate Issued Without COP by CA (M18R, N16M, P17M,M19R)
655.10
The manager of ZedEx (P) Ltd. approached CA. Vineet in the need of a certificate in respect of a
consumption statement of raw material. Without having certificate of practice (CoP), CA. Vineet issued
the certificate to the manager of the company, acting as a CA in practice and applied for the CoP to the
Institute on very next day to avoid any dispute.
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Following has not been included in detail by the institute in answer, however as per author it is advisable
that it shall be included. Students are free to take their stand.
Section 6 -Certificate of Practice tells about the significance of COP.
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CNO Sec 6 --Practice during Suspension (N11E, P17M)
655.2
A Chartered Accountant in practice has been suspended from practice for a period of 6 months and he had
surrendered his Certificate of Practice for the said period. During the said period of suspension, though
the member did not undertake any audit assignments, he undertook representation assignments for
income tax whereby he would appear before the tax authorities in his capacity as a Chartered Accountant.
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Once person becomes member of ICAI, he is bound by CA Act and corresponding ICAI regulation. In such
case he can do any work related to CA practice like accounting, auditing, tax costing, finance etc only in
capacity as CA not in capacity of any other professional like CS, Lawyer etc.

CNO Sec 6 --Practice during Suspension (M18E)
655.30
Mr. Dice, a practising Chartered Accountant was ordered to surrender his Certificate of Practice and he
was suspended for one year on certain professional misconduct against him. During the period of
suspension, Mr. Dice, designating himself as GST Consultant, did the work of filing GST returns and made
appearance as a consultant before various related authorities. He contended that there is nothing wrong
in it as he, like any other GST consultant, could take such work and his engagement as such in no way
violate the order of suspension inflicted on him. Is he right in his contention?
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CNO Sec 22 --Examples of Other Misconduct (N4E,M8R)/(P17M, S17M) / (N16E)
656.0
Write a short note on Other Misconduct.
OR
A Chartered Accountant is liable for disciplinary action under section 21 of CA Act, 1949, if he is found
guilty of any professional or other misconduct Explain the meaning of other misconduct with the help of
two illustrative examples.

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¾ Some illustrative examples, where a member may be found guilty of “Other Misconduct”,
under the aforesaid provisions rendering, himself unfit to be member are:
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CNO Sec 27 --Sec 27 (Separate branch In charge) (N12M, P17M)
657.0
Write a short note on - Maintenance of branch offices by Chartered Accountants in practice.

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CNO Sec 27 --Sec 27 (Separate branch In charge) / ITO (P17M, S17M) / (N12E, N15E, M17M, M19E)
658.0
Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in Mumbai near Church Gate.
Due to increase in professional work, he opens another office in a suburb of Mumbai which is
approximately 80 kilometres away from his existing office. For running the new office, he employs three
retired Income-tax Officers
OR
K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of Chennai.
Due to increase in the income tax assessment work, he opens another office near the income tax office.
For running the new office, he has employed a retired income Tax Commissioner.

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As per section 27 of the CA Act ,1949 - Distance from existing office is of no importanceWhat is important
is distance from “Municipal Limits” in which existing office is situated.
Here institute has assumed the distance from existing office is same as distance from Municipal limits.
(Also refer chart in previous question)

CNO Sec 27 --Sec 27 (Separate branch In charge) No Intimation (M18E)
659.0
M & Co., a sole proprietary Chartered Accountant firm in practice with an office in a busy belt of a city,
had great difficulty in regularly attending to the consultancy needs of his clients who are mostly located
in an industrial cluster in a nearby outskirt which is situated at a distance of 26 kms from the office of the
firm. To mitigate the difficulty and to have ease of business, a facilitation centre was opened in the
industrial cluster. The proprietor managed both the office and the facilitation centre, by himself. No
intimation was made to the Institute of Chartered Accountants of India. Examine whether there is any
professional misconduct in this respect
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# Mistake point
Here it is written that another office is opened in a suburb of Mumbai which is approximately 26
kilometres away from his “existing office”.
As per section 27 of the CA Act ,1949 –
1. Distance from existing office is of no importance . What is important is distance from “Municipal
Limits” in which existing office is situated.
Here institute has assumed the distance from existing office is same as distance from Municipal
limits. For this point is not guilty.
2. Opening and closing of branch are required to be informed to the institute as per section 27(2) of
the CA Act ,1949 and it should be informed within 1 month as per regulation 189. But for this point
he is guilty. Further many students may miss this point, so be careful.
(Also refer chart in previous question)
CNO Sec 27 --Sec 27 (Separate branch In charge) Same Board at Residence (N07E, P17M)
660.0
XY & Co., a firm of Chartered Accountant having 2 partners X & Y, one in charge of Head Office and another
in charge of Branch at a distance of 80 kms, puts up a name-board of the firm in both premises and also in
their respective residences.

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FIRST SCHEDULE
CNO First Schedule, Part I,Cl,1-Working on behalf of CA or CA firm (M19E)

660.10
CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor of his
father’s company M/s Max Ltd., to allow him to have some practical and professional knowledge and
experience in his firm before he can set up his own professional practice. CA Pant allowed him to sit in his
office for 6 month and allotted a small chamber with other office infrastructure facility. In the course of
his association with CA Pants office, he used to provide tax consultancy independently to the client of the
firm and also filed few IT and GST return and represented himself before various tax authorities on behalf
of the firm although no documents were signed by him. During his association in CA Pants office he did
not get any salary or share of profit or commission but only re-imbursement of usual expenses like
conveyance, telephone etc. was made to him. After the end of the agreed period, he was given a lump
sum amount of 3,00,000 by CA Pant for his association out of gratitude. Examine the case in the light of
code of professional misconduct.
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CNO First Schedule, Part I,Cl,2 --Sale of Goodwill (N4E,N8R,N12E) (N17R, P17M, S17M)
661.0
A Chartered Accountant who was in practice since last 18 years died in a road accident. His widow sold the
practice to another Chartered Accountant in practice for ` 30 lakhs. The price also included the right to use
the firm name.
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CNO First Schedule, Part I,Cl,2 –Sharing with of Fees (M16E, P17M, S17M, N17M, N19M,N19E)
662.0
Mr. X who passed his CA examination of ICAI on 18th July 2015 and started his practice from August 15,
2015. On 16th August 2015, one female candidate approached him for articleship. In addition to monthly
stipend, Mr. X also offered her 1 % profits of his CA firm. She agreed to take both 1 % profits of the CA firm
and stipend as per the rate prescribed by the ICAI. The Institute of Chartered Accountants of India sent a
letter to Mr. X objecting the payment of 1 % profits. Mr. X replies to the ICAI stating that he is paying 1 %
profits of his firm over and above the stipend to help the articled clerk as the financial position of the
articled clerk is very weak. Is Mr. X Liable to professional misconduct?
OR
CA Ciya, a practicing Chartered Accountant gave 60% of the audit fees received by her to Mr. Suhas, who
was not a Chartered Accountant, under the nomenclature of office allowances.
OR
CA. P is a newly qualified Chartered Accountant in practice and in order to increase his professional
practice and client base, entered into an agreement with Mr. A, a qualified and experienced registered
valuer to share 20% professional fees for all cases of valuation referred to him by CA. P. Based on this, CA.
P received ? 1,20,000 during the year 2018-19 from Mr. A. Is' CA. P guilty of misconduct under the
Chartered Accountants’ Act, 1949 ?
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CNO First Schedule, Part I,Cl,2 & Cl 3 Sharing & Accepting (Advocate) (M15R, M16E, P17M, M18M)
662.01
Mr. A is a practicing Chartered Accountant. Mr. B is a practicing Advocate representing matters in the court
of law. Mr. A and Mr. B decided to help each other in the matters involving their professional expertise.
Accordingly, Mr. A recommends Mr. B in all tax litigation matters in the court of law and Mr. B consults
Mr. A in all matters related to finance and other related matters, which comes to him in arguing various
cases in the court of law. Consequently, they started sharing some part in the profits of their professional
work.
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First Schedule, Part I,Cl 4 Partnership Outside India With Foreign Professional (N11R, P17M, N18M,
CNO
First Schedule, Part I,Cl 7 Designation Consultant N18R)
664.0
Discuss whether the following actions by a Chartered Accountant would amount to misconduct or not:
(i) A Chartered Accountant practising in India enters into partnership with
(a) A Certified Public Accountant in New York.
(b) A Chartered Accountant from the Institute of Chartered Accountants in England and
Wales in London, and in each case, the members concerned take the profits earned in
their own country.
Will it make any difference, if an Indian Chartered Accountant is practising outside India and becomes a
partner with the aforesaid accountants?
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(ii) A practising Chartered Accountant uses a visiting card in which he designates himself, besides as
Chartered Accountant, as
(a) Tax Consultant
(b) Cost Accountant.
Answer Part (i)
Part I -- Relevant Laws
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A Certified Public Accountant in New York means a Certified Public Accountant practising in New York
(b) Partnership with a chartered accountant from ICAEW
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Chartered Accountant from the Institute of Chartered Accountants in England and Wales in London means
a practising Chartered Accountant from the Institute of Chartered Accountants in England and Wales in
London
Chartered Accountants practising outside India:
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Alternative View –
CA Act is not applicable outside India .Hence there would be no misconduct .Further BOS has deleted this
part of the question in practice manual .If this part is asked in exam mention both views.
Part (ii)
Part I -- Relevant Laws
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CNO First Schedule, Part I,Cl 4 Partnership (Advocate) (N5E,M9R,P17M,S17M,N18R,M19R)
665.0
Mr. P, a Chartered Accountant in practice entered into a partnership with Mr. L, an advocate for sharing
of fees for work sent by one to the other. However, due to some disputes, the partnership was dissolved
after 1 month without any fees having been received.
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CNO First Schedule, Part I,Cl 4 Partnership with Non-CA’s (P17M,M15E)

666.0
A Chartered Accountant having CoP entered into partnership with persons, who are not the members of
the institute, for the purpose of carrying on business. The share of the chartered account in the profit and
losses was 25%. He was to take part in the business and was entitled to represent the firm before Govt.
authorities etc. He was operating the bank account of the firm, was receiving moneys from the customers
and was also looking after the affairs of the Partnership.
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CNO First Schedule, Part I,Cl,6 Advertisement (Opening Ceremony) (M10E, S17M, P17M)
667.0
An advertisement was published in a Newspaper containing the photograph of Mr. X, a member of the
institute wherein he was congratulated on the occasion of the opening ceremony of his office.
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Even if advertisement is given by others like relatives or friends then also guilty

CNO First Schedule, Part I,Cl,6 Clarification (Books) (N05E, M09R, M13M, S17M, P17M)
668.0
Mr. S, a Chartered Accountant published a book and gave his personal details as the author. These details
also mentioned his professional experience and his present association as partner with M/s RST, a firm.
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CNO First Schedule, Part I,Cl,11 Clarification (Books, Cooking Book Without (M16M, M18M)
668.1 Permission)
CA. Ritu is a leading Income Tax Practitioner in Delhi. She is very much fond of cooking. Due to this passion
of her, she also wrote a cookery book “Delight your tummy” during the year. But, she didn’t take any
permission from the Council of the Institute for engaging herself into authorship of such book. Comment.
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CNO First Schedule, Part I,Cl,6 Clarification (Greeting Cards & Invitations)/ Marriage (P17M) / (N17R, N18R)
669.0
Mr. Raj, a renowned practicing Chartered Accountant, decided to tie his knot with Ms. Anjani. While giving
order for marriage invitation cards, Mr. Raj instructed to add his designation “Chartered Accountant” with
his name. Later on, the cards were distributed to all his relatives, close friends and clients.
OR
Mr. Swapnil, a renowned practicing Chartered Accountant, decided to tie his knot with Ms. Anjani. While
giving order for marriage invitation cards, Mr. Swapnil instructed to add his designation “Chartered
Accountant” with his name. Later, the cards were distributed to all his relatives, close friends and clients.
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Author’s Note:
Clarification regarding GREETING CARDS / INVITATIONS
x Cannot use “Chartered Accountant” designation, free to use prefix CA (General Rule)
x Exceptions (Use of “Chartered Accountant” designation- Allowed in below cases)
o Greeting Cards
o Invitation to Religious Ceremony / Opening of office / Marriages (CA’s) / Intimation of
change in office, premises or telephone number.
PROVIDED it should be sent to CLIENTS / RELATIVES / FRIENDS.
CNO First Schedule, Part I,Cl,6 Clarification (Greeting Cards & Invitations) Sonu/Monu (M16R, N16M)
670.0
CA. Sonu and CA. Monu are two partners of the CA firm ‘Sonu Monu and Associates’. Being very pious, CA.
Sonu organised a religious ceremony at his home for which he instructed his printing agent to add his
designation “Chartered Accountant” with his name in the invitation cards. Later on, the invitations were
distributed to all the relatives, close friends and clients of both the partners.
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Here invitations are sent to relatives, close friends and clients of CA. Monu as well. If the invitations were
only sent to relatives, close friends and clients of CA Sonu then he would not have been guilty.

CNO First Schedule, Part I,Cl,6 Clarification (Mass Communication to Other CA in Practice) (N14R, P17M)
672.0
CA. N, in practice, started project consultancy work as a part of his practice and to advance the same, sent
mail to all the CAs in the country informing them of his services and for securing professional work.
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If paper advertisement is given , it goes to everyone -“Guilty”
If email sent only to CA’s -“ Not Guilty”

CNO First Schedule, Part I,Cl,6 Clarification Clarification (Public Interview) (N13E, S17M, P17M, M18E,
673.0 N19M)
Mr. Nigal, a Chartered Accountant in practice, delivered a speech in the national conference organized by
the Ministry of Textiles. While delivering the speech, he told to the audience that he is a management
expert and his firm provides services of taxation and audit at reasonable rates. He also requested the
audience to approach his firm of chartered accountants for these services and at the request of audience
he also distributed his business cards and telephone number of his firm to those in the audience.
Comment.
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First Schedule to the Chartered Accountants Act, 1949
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CNO First Schedule, Part I,Cl,6 Clarification (Public Interview) [TV Interview Case] (N08R, S17M,P17M)
674.0
A partner of a firm of chartered accountants during a T.V. interview handed over a bio-data of his firm to
the chairperson. Such bio-data detailed the standing of the international firm with which the firm was
associated. It also detailed the achievements of the concerned partner and his recognition as an expert in
the field of taxation in the country. The chairperson read out the said bio-data during the interview.
Discuss whether this action by the Chartered Accountant would amount to misconduct or not.
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CNO First Schedule, Part I,Cl,6 Clarification (Representation by CA Under (P17M, M15R, M18M, M16M,
675.0 Company Act) M19M,N19E)
A special notice has been issued for a resolution at 3rd annual general meeting of Fiddle Ltd. providing
expressly that CA. Smart shall not be re-appointed as an auditor of the company. Consequently, CA. Smart
submitted a representation in writing to the company as provided under section 140(4)(iii) of the
Companies Act, 2013. In the representation, CA. Smart incorporated his independent working as a
professional throughout the term of office and also indicated his willingness to continue as an auditor if
reappointed by the shareholders of the Company
OR
A special notice has been issued for a resolution at 3rd annual general meeting of Fiddle Ltd. providing
expressly that CA. Smart shall not be re-appointed as an auditor of the company. Consequently, CA. Smart
submitted a representation in writing to the company as provided under section 140(4)(iii) of the
Companies Act, 2013. In the representation, CA. Smart incorporated his independent working as a
"$%, 676
professional throughout the term of office and also indicated his willingness to continue as an auditor if
reappointed by the shareholders of the Company. Advise on above with reference to the Chartered
Accountants Act, 1949, and Schedules thereto
OR
Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto :
A special notice has been issued for a resolution at 3rd annual general meeting of LED Ltd., providing
expressly that CA. Anoop shall not be re-appointed as an auditor of the company. Consequently, CA.
Anoop submitted a representation in writing to the company with a request to circulate to the members.
In the detailed representation, CA. Anoop included the contributions made by him in strengthening the
control procedures of the company during his association with the company and also indicated his
willingness to continue as an auditor if reappointed by the shareholders of the company.
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CNO First Schedule, Part I,Cl,6 Clarification (Roving Inquiry) (M11E, P17M, N17E, M17M)
677.0
A CA firm M/s GST & Associates, has sent a letter to the Goods and Service Tax Council stating that the
firm has 2 partner who specialise in the law of Goods and Service Tax and asked the said Council to include
their name in the panel, whenever formed, for providing advisory and audit services for Goods and Service
Tax. Comment with reference to the Chartered Accountants Act, 1949
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Author’s Note
x There are
o 12 clarifications of Clause 6 of Part I of First Schedule to the Chartered Accountants Act,
1949
o 10 clarifications of Clause 7 of Part I of First Schedule to the Chartered Accountants Act,
1949 and
o 8 common clarification for above clause 6 & 7
o The above question is related to 12 clarifications of Clause 6 of Part I of First Schedule to
the Chartered Accountants Act, 1949 .
If any question relates to these clarifications, concerned clause number should be
referred
Clarifications & shortcut to remember clarifications are explained in detail in regular
lectures and books.

x “Request for empanelment- Not Solicitation “ Vs “Roving inquiry – Solicitation”

o Roving Inquiry means applying without verifying whether there is requirement or panel
maintained by authority.
o Empanelment where CA is aware about panel is not guilty.
These are 2 separate points, below are 2 separate points :
o Roving Inquiry Circular
It is not permissible for a member to address letters or circulars to persons who
are likely to require services of a Chartered Accountant since it would tantamount
to advertisement.
o Applying for empanelment
CA can apply if he has information regarding existence of panel.
Mention fees (only if asked
No cyclostated (pre-printed) copies of fees

CNO First Schedule, Part I,Cl,6 Solicitation (Another CA Firm) (N13E, S17M, P17M)
678.0
Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered Accountants a firm
of CAs; requesting them to allot him some professional work. As he did not have a significant practice or
clients he also wrote a letter to M/s ABC, a firm of Chartered Accountants for securing professional work.
Mr. Clever, another CA, informed ICAI regarding Mr. Honesty’s approach to secure the professional work.
Is Mr. Honest wrong in soliciting professional work?
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CNO First Schedule, Part I,Cl,6 Solicitation (Accepting work emanating from (M10E, S17M, P17M, N18E)
678.01 contact of Another CA) / (Personal Communication)
During the opening ceremony of a new branch office of CA.Young, his friend CA.Old introduced to
CA.Young, his friend and client Mr. Rich, the owner of an Export House whose accounts had been audited
by CA.Old for more than 15 Years. After few days, Mr. Rich approached CA.Young and offered a
certification work which hitherto had been done by CA.Old. CA.Young undertook the work for a fee which
was not less than fee charged by CA.Old in earlier period. Comment whether CA.Young had done any
professional misconduct.
OR
Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant
Registrar of Co-operative Societies stating that though his firm was on the panel of auditors, no audit work
was allotted to the firm and further requested him to look into the matter.
OR
Can a Practicing Chartered Accountant be held guilty of Professional Misconduct under the following
circumstances? Give your views with reasons in brief.
Z, a Chartered Accountant wrote several letters to Government Department, pointing out seniority of his
firm, sending his life sketch and stating that he had a glorious record of service to the country as well as
to the organization of accountancy profession with a view to get the audit work.
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CNO First Schedule, Part I,Cl,6 Solicitation (Tender) Land Revenue (M06E, N10R, M12R, M12M, M13R,
681.0 M14R, S17M, P17M, N18M)
M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for
computerization of land revenue records. For this purpose, the firm also paid ` 50,000 as earnest deposit
as part of the terms of the tender.
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CNO First Schedule, Part I,Cl,6 Solicitation (Tender) No Minimum Fees (N17R, M17R)
682.0
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto:
M/s LMN & Associates, a firm of Chartered Accountants responded to a tender issued exclusively for
Chartered Accountants by an organisation in the area of tax audit. However, no minimum fee was
prescribed in the tender document.
OR
PK Foundation decided to review its historical financial statements For this, it proposed a tender
exclusively for Chartered Accountants to obtain assurance, primarily by performing inquiry and analytical
procedures, about whether the financial statements as a whole are free from material misstatement
However, the foundation did not prescribe the minimum fee in the tender document M/s Sodhi & Co, a
Chartered Accountant firm, responded to such tender
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Author’s Note
For better understanding of tendering refer Chart in CNO 681.0

CNO First Schedule, Part I,Cl,6 -Website (Award Highlighting) (N15R, P17M, N18M)
683.0
CA. Intelligent, a Chartered Accountant in practice, provides part-time tutorship under the coaching
organization of the Institute. On 30th June 2015, he was awarded ‘Best Faculty of the year’ as gratitude
from the Institute. Later on, CA. Intelligent posted his framed photograph on his website wherein he was
receiving the said award from the Institute.
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Author’s Note
In case of any question w.r.t website always apply Clause 6of Part I of the First Schedule to the Chartered
Accountants Act, 1949 as guidelines of website are issued under that clause .

CNO First Schedule, Part I,Cl,6 -Website (Bio Data & Photographs) (M05E, S17M, P17M)
684.0
M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The website besides
containing details of the firm and bio-data of the partners also contains the photographs of all the partners
of the firm.
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Author’s Note
In this question it is assumed that photograph was a passport size one, which is not prohibited.

CNO First Schedule, Part I,Cl,6 -Website (Link of Associations) (N08R, M08E, M12R, M12M,
685.0 M13R, P17M)
XYZ & Associates, a firm with 5 partners developed a website www.xyzassociates.com. The website also
contained a link to “All India Chartered Accountants Association”, a voluntary association where X, a
partner of the firm is currently the Vice-president.
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CNO First Schedule, Part I,Cl,6 -Website (Multiple Issues) (M07E, M09R, N16M, P17M, M18R, M19R)
686.0
Mr. Brilliant, a chartered accountant in practice, created his own website in attractive format and
highlighted the contents in blue colour. He also circulated the information contained in the website
through E-mail to acknowledge public at large about his expertise. However, due to shortage of time, he
could not intimate his website address to the Institute
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Author’s Note
As on today, no need to take permission for website, no need to immediately intimate about website to
ICAI. Website guidelines says that when annual fees are paid , details should be given as required by
membership form ,however as membership form has no place or requirement to specify about website,
practically no need to inform annually also

Conclusion
ICAI can collect information through fees form but ICAI has not exercised its power yet.
CNO First Schedule, Part I,Cl,6 -Website (Push Technology) (S17M, P17M, M17R)
687.0
M/s ABZ & Co., a firm of Chartered Accountants, develops a website “abz.com”. The colour chosen for the
website was a very bright green and the website was to run on a “push” technology where the names of
the partners of the firm and the major clients were to be displayed on the website without any disclosure
obligation from any regulator.
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Author’s Note
Push technology is not allowed for websites, but it is allowed for write up under clause 7 of Part I of First
Schedule to the Chartered Accountants Act, 1949
CNO First Schedule, Part I,Cl,6 -Website (Visit Our Website) (N10E,P17M)
688.0
PQR and Associates, Chartered Accountants have their website and on the letterhead of the firm it is
mentioned that "Visit our website: PQR com". In the website the nature of assignments handled, names
of prominent clients and fees charged is also displayed.
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CNO First Schedule, Part I,Cl,7 Designation (S17M)

689.0
A practising Chartered Accountant uses a visiting card in which he designates himself, besides as Chartered
Accountant, Cost Accountant.

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CNO First Schedule, Part I,Cl,7 Designation (CA & Advocate Together) (M13E, P17M)
691.0
Mr. B, a practicing Chartered Accountant as well as a qualified lawyer, was permitted by the bar council
to practice as a lawyer also. He printed his visiting card where he mentioned his designation as Chartered
Accountant and Advocate.
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Dual COP of CA & Advocate is allowed by ICAI but the same has not been approved by BAR Council of
India . Hence practically not possible .
CNO First Schedule, Part I,Cl,7 Designation (Merchant Banker) (M15E, P17M)
692.0
Mr. SP, a Chartered Accountant, obtains registration as category IV Merchant Banker under the SEBI’s
Rules and Regulations and act as Advisor to a capital issue of MB Co. Ltd. He designates himself under the
caption “Merchant Banker” in client offer documents and ‘Advisor to issue’ in his own letterheads, visiting
cards and professional documents
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CNO First Schedule, Part I,Cl,7 Designation- Insolvency Professionals (N18R,M19E)
692.10
Chartered Accountant in practice, empanelled as an Insolvency Professional (IP) has mentioned the same
on his visiting cards, letter heads and other communications also. A person residing in his neighbourhood,
has filed a complaint for professional misconduct against the said member for such mention of IP. You are
required to examine the same with reference to the Chartered Accountants Act, 1949.
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CNO First Schedule, Part I,Cl,7 Professional Achievements (Liasoning) (M12E, P17M)
693.0
M, a practicing Chartered Accountant sent a letter to another firm of Chartered Accountants, claiming
himself to be a pioneer in liasoning with Central Government Ministries and its allied Departments for
getting various Government clearances for which he had claimed to have expertise and had given a list of
his existing clients and details of his staff etc.
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Author’s Note
Normally sending letters and asking for work from other CA firms is not a misconduct but we cannot
misuse this exception, like the firm did here.
Here CA M more than asking for work was advertising himself to another firm by mentioning things that
can be influential.
Sending letters is principally covered in clause 6, clarifications and permissions are also given in clause 6.
So even if professional attainments are highlighted (generally covered by Clause 7 )court has applied clause
6.
I understand that it includes highlighting professional matters. But in PE more than interpretation we have
to understand pattern.

CNO First Schedule, Part I,Cl,7 Visiting Card (Name of Multiple Firms) (M06E, M09E, M12R, M12M, N15E,
694.0 P17M, N17M)
CA Naman, a Chartered Accountant in practice is a partner in 4 firms. On the personal Letter Heads, he
mentioned the names and addresses of all the 4 firms in small fonts
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CNO First Schedule, Part I,Cl,7 --Visiting Card (Quick Response Code) (M17E, N18M)
695.0
Mr. M, a Chartered Accountant in practice, has printed visiting cards which besides other details also
carries a Quick Response (QR) code. The visiting card as well the QR code contains his name, office and
residential address, contact details, e-mail id and name of the firm's website. Comment with reference to
the Chartered Accountants Act, 1949 and schedules thereto.
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CNO First Schedule, Part I,Cl,6 and 7 Professional Achievements (Offer Documents) (M09R, S17M, P17M,
695.01 N18E)
Is there any misconduct on the part of a Chartered Accountant in the following circumstances?
The offer document of a listed company in which Mr. D, a practising Chartered Accountant is a director
mentions the name of Mr. D as a director along with his various professional attainments and spheres of
specialisation
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CNO First Schedule ,Part I,Cl,8 --Communication (After Acceptance Before Signing) (P17M)
696.0
Mr. X, a Chartered Accountant accepted his appointment as tax auditor of a firm under Section 44AB, of
the Income-tax Act, and commenced the tax audit within two days of his appointment since the client was
in a hurry to file Return of Income before the due date. After commencing the audit, Mr. X realised his
mistake of accepting this tax audit without sending any communication to the previous tax auditor. In
order to rectify his mistake, before signing the tax audit report, he sent a registered post to the previous
auditor and obtained the postal acknowledgement. Will Mr. X be held guilty under the Chartered
Accountants Act?
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Author’s Note
As per Companies Act 2013, now acceptance by auditor is not required after appointment .Now in fact
prior approval is required before appointment. But clause 8 is not yet amended to bring it at par with
companies act.

CNO First Schedule ,Part I,Cl,8 Communication Over Phone (M16M , M18M)
696.10
M/s CD & Co., a firm of Chartered Accountants, accepted an assignment for audit under GST Law and
communicated the same over phone to the previous auditor, M/s AB & Co., Chartered Accountants.
Comment.
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CNO First Schedule ,Part I,Cl,8 --Communication (Certificate of Posting) (N16R,P17M)

698.0
W, a Chartered Accountant has sent letters under certificate of posting to the previous auditor informing
him his appointment as an auditor before the commencement of audit by him.
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CNO First Schedule ,Part I,Cl,8 --Communication (Of Internal Auditor to (N16M, N14R, P17M,M19M)
699.0 Statutory Auditor
CA. T, in practice, was appointed to carry out internal audit of a stock broker, listed with BSE. However, he
failed to intimate his appointment to the statutory auditors of the company. The statutory auditor feels
this is violation of professional ethics.
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CNO 700 First Schedule ,Part I,Cl,8 --Communication (Previous Audit Fees Unpaid) (M09R, N10E,N12R, P17M)
XYZ Ltd. appoints you as the auditor of the company. You observe that previous auditors A & Co., resigned.
Also Balance Sheet as at 31-03-2015 shows an audit fee payable of ` 25,000. What precautions you will
take before commencing the audit work?
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Author’s Note
Answer does not contain reference of Council Guidelines 2008.

CNO First Schedule, Part I,Cl,8 --Communication Undercutting / Lower Audit Fees (N06E, P17M)
702.0
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto:
Mr. Rahul, a locally based Chartered Accountant, accepted an audit assignment at a fee lower than that
charged by the previous auditor, who was stationed in another town and had to spend a lot of money on
travel for which he did not charge separately.
Answer ¾
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Author’s Note
CA Act was amended in 2006 .Prior to amendment there were 13 clauses in Part I ,Schedule I . One of the
clauses specifically prohibited undercutting .But this clause was removed in amendment. So as of now
undercutting is allowed . So, in this question even if there is no valid reason for undercutting it will be
allowed.
However, ICAI planning to bring the clause relating to undercutting back in future.

CNO First Schedule, Part I,Cl,8 --Communication (With previous GST Auditor (M8E,N10R,M14R,P17M)
704.0 Who)
BC & Co., a firm of Chartered Accountants, accepted an assignment for audit under State level GST Act,
without any prior communication with the previous auditor.
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CNO First Schedule, Part I,Cl,9 Disqualification (M10E, P17M)

705.0
Mrs. Fair is a Director of XYZ Private Limited, having 15% shareholdings in the company. During 2014, the
company appointed C.A. Mr. Lovely, Mrs. Fair's spouse, as its statutory auditor. On Mr. Lovely's advice,
the company issued fresh equity shares in 2014-15, in the ratio of one share for every two shares held by
the shareholders of the company. Mr. Lovely used to deliver audit report for subsequent years without
any comments or disclosures, thereupon
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Author’s Note
Additional Points that can also be mentioned in this question.

¾ Appointment of Auditor in case of Relative Holding Substantial Interest:
Clause (4) of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that if an
auditor expresses his opinion on the financial statements of any business or enterprises in which
he, his firm or a partner in his firm has a substantial interest, he is committing professional
misconduct.
¾ Council Guidelines 2008 & AS 18
Further as per Council General Guidelines, a member of the Institute shall not express his opinion
on financial statements of any business or enterprise in which one or more persons, who are his
“relatives” within the meaning of AS 18 have, either by themselves or in conjunction with such
member, a substantial interest in the said business or enterprise.
Where Auditor and Company are related (Tips)
¾ Where Auditor and Company are having relation of any kind , Clause (4) of Part I of the Second
Schedule should be referred in all questions and if substantial interest is not found conclusion
should be given not guilty but mentioning the clause is must.
¾ Where Auditor and Company are having relation of any kind Council guidelines should be referred
in all questions
¾ AS 18 (always when relative is involved)
As per AS 18 Relative" means the spouse, son, daughter, brother, sister, father and mother who
may be expected to influence, or be influenced by that individual in his/her dealings with the
reporting enterprise
¾ Companies Act section shall also be referred .( if question mentions the following:-)
If CA himself or relative is director or is in employment with company as director or KMP
- Section 141(3)(f) of the Companies Act, 2013
If CA himself or relative is holding shares in company and question tells about the face
value of the shares held by relative - Section 141(3)(d) of the Companies Act, 2013.
And where section 141(3) applies Clause (9) of Part I of the First Schedule also applies
CNO First Schedule, Part I,Cl,9 Improper Appointment (Declined to (N11R, N12M, M15E, S17M,P17M)
706.0 Accept)
CA. X was appointed as the Auditor of ABC Ltd. for 2014-15. Since he declined to accept the appointment,
the Board of Directors appointed CA. Y as the auditor in the place of CA. X, which was also accepted by CA.
Y.
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¾ Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949,
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0

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Author’s Note
As per Companies Act 2013, now acceptance by auditor is not required after appointment .Now in fact
prior approval is required before appointment . This question and the answer needs to be changed .
CNO First Schedule, Part I,Cl,10 -- Charging Percentage of Debt Recovery (M17R, M18E, M18M)
707.0
PQR Pvt Ltd. approached CA. Whai, a Chartered Accountant in Practice, for debt recovery services. CA
Whai accepted the work and insisted for fees to be based on 2% of the debt recovered.
OR
Alora Pvt. Ltd. approached CA. Neha, a practicing Chartered Accountant since 1998, for recovery of debts
amounting Rs 20 crore. CA Neha accepted the work and requested to charge fees @ 1.5% of the debt
recovered. Later on, she raised a bill for debts recovered and charged ` 27 lacs for recovering 90% of the
debts.
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CNO Fees as percentage of Loan (N8E,N11R,N12M,M15R,P17M,N18E)

707.02
D, a practising Chartered Accountant examined and reported on the prospective financial statements for
one of his clients to obtain a cash credit facility of Rs75 lakhs from a Private Bank. The Bank has
sanctioned the cash credit facility for Rs 60 lakhs to his client. Consequent to the sanction of loan by
Bank, he charged a fee of Rs 60, 000 based on 1% of the credit facility sanctioned.
OR
Mr Clever, a Chartered Accountant, prepared a project report for one of his client, Mr King, to obtain long
term loan of Rs 100 lakhs from a scheduled bank and decided to charge fees @10% of the loan approved
Subsequently, the bank approved the loan amounting to Rs 80 lakhs Consequent to the approval of loan
by the bank, Mr Clever raised an invoice for his services @10% of the loan approved, as decided.
"$%, 667
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Author’s Note:
I had long discussion with audit team of BOS, i also strongly feel it is part of fundraising but BOS says words
used are “Certain Fundraising Services” and now what is this “certain” services need to be listed out by
ICAI but they have not done it yet, even after 6 years of regulation amendment. They say till the time ICAI
issues list we will assume no services are allowed.
So final conclusion, no fundraising servicing is allowed till ICAI defines what do you mean by “Certain
Fundraising Services”
CNO First Schedule, Part I,Cl,10 Fees on Percentage Basis (Liquidator) N17M, P17M,M16M,
709.0 N18M
XYZ & Co. appointed CA. M, a practicing chartered accountant, as liquidator of the company. CA. M
charged his professional fees based on percentage of the realisation of assets
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"$%, 66
Author’s Note
#controversy

“Certain Fund-raising Services” falls under exemption of regulation 192 but what fall under
“Certain fund-raising services “ is not defined anywhere. This question was answered by the institute
on the basis that since nothing is defined as to what falls under certain fund-raising services no
exemption would be available under regulation 192 . Only the services that would be listed in future
under certain fund raising services will be get the exemption.

CNO First Schedule, Part I,Cl,11 Accepting Directorship Where Partner is Auditor (N10E, P17M)
711.0
Mr. B is a practising Chartered Accountant holding a valid certificate of practice. He accepted the
appointment as Director of the Green WorId Co. Ltd. Mr. C, a partner of Mr. B is statutory auditor of the
said company.
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¾ Section 141(3)(c) & 141(4) of the Companies Act, 2013

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Author’s Note
Here in this question, as mentioned in the conclusion, there was contravention of :
1. Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949 &
2. Companies Act ,2013
"$%, 666
You must be thinking why not of Clause (4) of Part I of the Second Schedule. Look at the question again. It
is written “he accepted the appointment as Director”
If the case was that “he accepted the appointment as auditor” in a company where he was already a
director. Following would have been considered.
1. Clause (4) of Part I of the Second Schedule
2. Clause (9) of Part I of the First Schedule
3. Companies Act ,2013
So why Clause 4 of Part I of the Second Schedule is mentioned?
Where Auditor and Company are having relation of any kind, Clause (4) of Part I of the Second Schedule
should be referred in all questions and if substantial interest is not found conclusion should be given not
guilty but mentioning the clause is must
Two options are available –
1. Accept Directorship, partner will leave Auditor ship
2. Partner will continue as auditor and CA B cannot become Director

CNO First Schedule, Part I,Cl,11 Accepting Position on Managing Director (M07E, M09R, N13R, P17M)
712.0
A chartered accountant in practice takes up the appointment as managing director of a public limited
company.
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CNO First Schedule, Part I,Cl,11 Business Occupation (Trading in (N08E, N11R, N12M, N13E, N15R,
713.0 Derivative) S17M, P17M, M17E, M18R, M18R)
CA. Raj is a leading income tax practitioner and consultant for derivative products. He resides in Bangalore
near to the XYZ commodity stock exchange and does trading in commodity derivatives. Every day, he
invests nearly 50% of his time to settle the commodity transactions, though he has not taken any
permission for this. Is CA. Raj liable for professional misconduct?
- , 2
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"$%, 668
¾ .- .

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Author’s Note
Few transactions will not be considered as trading activity .Continuous transaction would be considered
as trading activity

CNO First Schedule, Part I,Cl,11 Directorship in Holding Company where he is auditor in (M08E, P17M)
714.0 Subsidiary
M, a Chartered Accountant in practice, is the Statutory Auditor of S Ltd. for the year ended 31st March
2015. In January 2015, he was appointed as a Director in H Ltd., which is the holding Company of S Ltd.
- , 2
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Author’s Note
x As per Committee on Ethical Standards has decided , director of holding should not become
auditor in subsidiary company, though it is not prohibited by Company Act 2013.
x As per Sec 141(3) directors of company cannot become auditors in the same Company. But the
Companies Act 2013 didn’t disqualify directors of holding company or subsidiary company from
doing so. Hence Sec 141(3) is not referred.

CNO First Schedule, Part I,Cl,11 General Permission (Editorship of Professional (M16R)
715.0 Magazine)
Comment on the following with reference to the Chartered Accountants Act, 1949, and Schedules thereto:
CA. Sufi is practicing since 2008 in the field of company auditing. Due to his good practical knowledge, he
was offered editorship of a ‘Company Audit’ Journal which he accepted. However, he did not take any
permission from the council regarding such editorship.
¾ -- , 2
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"$%, 66>
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CNO First Schedule ,Part I,Cl,11 --General Permission (Private Tutorship) (M16E, P17M, N18R, M18M)
716.0
CA Ram is practicing in the field of financial management planning for over 12 years. He has gained
expertise in this domain over others. Mr. Ratan, a student of Chartered Accountancy course, is very much
impressed with the knowledge of CA. Ram. He approached CA. Ram to take guidance on some topics of
financial management subject related to his course. CA. Ram, on request, decided to spare some time and
started providing private tutorship to Mr. Ratan along with some other aspirants. However, he forgot to
take specific permission for such private tutorship from the Council.
- , 2
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Part II -- Requirements of Relevant Law
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Author’s Note
¾ Let’s first talk about tutorship
Tutorship means teaching other than formal education given in schools / colleges etc or which is
given to support distance education, basically coaching in our regular language
¾ Now let’s talk about Lectureship

Lectureship (junior) / Professorship (senior) means giving formal education for a course in schools
/ colleges / institutes who established these courses.
¾ Let’s further simplify
If at ICAI
x Part Time Tutorship — No Approval
"$%, 66:
x Full Time Tutorship — Silent / Because not done / if done permission will be
required (implicit interpretation)
x Part Time / Full Time Lectureship — No Approval
if at other organisation
x Part time / full time tutorship — approval required
x Part time / full time lectureship — approval not required
if at home, office etc (unorganised)
x private tutorship — no approval required
CNO First Schedule ,Part I,Cl,11 Lectureship (M13M, S17M, P17M)

717.0
A chartered accountant holding certificate of practice and having four articled clerks registered under him
accepts appointment as a full-time lecturer in a college. Also, he becomes a partner with his brother in a
business
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Author’s Note
¾ Refer Note of CNO 716.0
¾ Clause 4 ,Part I ,Schedule 1 is also applicable as he, being a CA in practice has entered into
partnership with his brother . No detail is provided regarding his brother.

CNO First Schedule, Part I,Cl,11 --Specific Permission (After Accepting (M10E, M16M, S17M, P17M,
719.0 Job) N17M, M18M, N18M)
CA. Aman, a practicing Chartered Accountant, took over as the executive chairman of Signora IT Ltd. on
01.04.2016. However, realizing about obtaining prior approval from the Council of the ICAI for engaging
into other business, he applied to the Council for permission within 10 days
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"$%, 66L
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CNO First Schedule, Part I,Cl,11 --Specific Permission(No Permission & No Intimation to ICAI) (P17M)
720.0
Mr. J started his practice as Chartered Accountant in 2014. During 2015, he got an offer for the post of
Chief Accountant of a Software Development Company, as a fulltime employee, for a salary of ` 60,000 per
month. On accepting this offer, Mr. J converted his practice into a partnership firm by taking a fresh
Chartered Accountant as his partner. Mr. J neither intimated the Institute nor obtained permission from
the Institute about his employment. Will Mr. J be held guilty under the Chartered Accountants Act?
- , 2
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.
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¾ As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949
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CNO First Schedule, Part I,Cl,11 --Specific Permission Permission (Part Time Employment) (N06E, P17M)
721.0
Mr. J.J. a practicing Chartered Accountant engages himself as part time finance manager of Quick Return
Securities Ltd. He is of the view that as both functions are independent, he need not take permission from
the Institute.
- , 2
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"$%, 66
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CNO First Schedule, Part I,Cl,12 --Signing (Audit Queries) (N17R, N16M)
722.0
Mr. 'Anuj' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for
3 months. He delegated the authority to Mr. 'Youth' a Chartered Accountant his employee for taking care
of routine matters of his office. During his absence Mr. 'Youth' has issued the audit queries to client which
were raised during the course of audit in the name of M/s A & Co.
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Author’s Note
The Council in this connection clarified that the Attest function for the purpose of this Resolution would
cover services pertaining to audit, review, certification, agreed upon procedures, and compilation, as
defined in the Framework of Statements on Standard Auditing Practices and Guidance Notes on Related
Services published in the July, 2001 issue of the Institute’s Journal.”
So, anything covered under attest function cannot be considered as routine work.

CNO First Schedule ,Part I,Cl,12 --Signing (Multiple (M11E, M14E, M17M, S17M, P17M, M18M,
723.0 Matters) N19R,N19E)
Mr. 'A' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for 3
months. He delegated the authority to Mr. 'Y' a Chartered Accountant his employee for taking care of
routine matters of his office. During his absence Mr. 'Y' has conducted the under mentioned jobs in the
name of M/s A & Co.
(i) He issued the audit queries to client which were raised during the course of audit.
(ii) He issued production certificate to a client under Central Excise Act, 1944.
"$%, 66M
(iii) He attended the Income Tax proceedings for a client as authorized representative before
Income Tax Authorities.
Please comment on eligibility of Mr. 'Y' for conducting such jobs in name of M/s A & Co. and liability of
Mr. 'An' under the Chartered Accountants Act, 1949.
OR
Mr. 'Zen' is a practicing Chartered Accountant working as proprietor of M/s Z & Co. He went abroad for 2
months. He delegated the authority to Mr. 'Yen', a Chartered Accountant, his employee, for taking care of
routine matters of his office. During his absence, Mr. 'Yen' issued production certificate to a client under
Central Excise Act, 1944 in the name of M/s Z & Co.
OR
CA. Smart, a practicing Chartered Accountant was on Europe tour between 15-9-15 and 25-9-15. On 18-9-
15 a message was received from one of his clients requesting for a stock certificate to be produced to the
bank on or before 20-9-15. Due to urgency, CA. Smart directed his assistant, who is also a Chartered
Accountant, to sign and issue the stock certificate after due verification, on his behalf.
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Author’s Note
Refer Note of CNO 722.0 for better understanding of what does not falls under routine work.

CNO First Schedule ,Part I,Cl,12 --Signing (Power of Attorney) (M07E, N08R, M09R, N13R, S17M,
724.0 P17M)
S, a Practicing-Chartered accountant gives power of attorney to an employee chartered accountant to sign
reports and financial statements, on his behalf.
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Author’s Note
x Whenever a particular section is involved with no other clause Schedule 2 , Part2 ,Clause 1 can be
referred
x Students can write this standard answer in all question of Clause (12) of Part I of the First Schedule
to the Chartered Accountants Act, 1949
CNO First Schedule,Part II,Cl,2 --Share of Fees from Lawyer of Company (M16M,M14E,S17M,P17M,N19E)
729.0
Mr. 'C', a Chartered Accountant holds a certificate of practice while in employment also, recommends a
particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee received
from employer paid a particular sum as referral fee to Mr. 'C'.
OR
"$%, 687
Mr. C a Chartered Accountant employed as Senior executive in charge of Tax in a company, and not holding
certificate of practice recommends a particular lawyer to his employer in respect of a case. The lawyer,
out of the professional fee received from the employer of Mr. C paid a particular sum as referral fee to Mr.
C . Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto
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Author’s Note
AABCC is the shortcut to remember this clause.
A,A- Advocate ,Agent / B-Broker / C-CA, C-Customer
CNO First Schedule, Part III,Cl,2 --Not Responding to ICAI (Date of Leaving Services of (M10E, S17M, P17M)
730.0 the Firm)
Mr. X, a Chartered Accountant, employed as a paid Assistant with a Chartered Accountant firm. On 31st
December 2016 he leaves the services of the firm. Despite many reminders from ICAI he fails to reply
regarding the date of leaving the services of the firm.
-6 ,,, 2
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Author’s Note
Students don’t write the names of all authorities and that’s why loose ,marks in this clause.
"$%, 68
There are total 8 authorities in the picture above . The first 4 are in ICAI hierarchy in the order of
importance and the next 4 are in Discipline hierarchy in the order of importance

CNO First Schedule, Part III,Cl,2 --Not Responding to ICAI (Non-Submission on Form 18) (M13M, P17M,
731.0 M17E, N18E)
X, a chartered accountant in practice, in spite of several reminders from the Secretary of the Institute of
Chartered Accountants of India fails to submit Form 18. Is he liable for misconduct?
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CNO Clause (2) of Part III of First Schedule-- Did Not Fill Columns (M14E,S17M,P17M)
731.10
Mr. 'G', while applying for a certificate of practice, did not fill in the columns which solicite information
about his engagement in other occupation or business, while he was indeed engaged in a business.
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CNO First Schedule, Part IV,Cl,2 Disrepute to Institute (Cheques Bounced) (M08E, P17M, N17E)
732.0
CA. D, a chartered accountant in practice availed of a loan against his personal investments from a bank.
He issued 2 cheques towards repayment of the said loan as per the instalments due. However, both the
cheques were returned back by the bank with the remarks "Insufficient funds".
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It is important to mention Negotiable Instruments Act 1881 in the answer. Even though it is important to
mention this in the answer students don’t mention this and loose marks.

CNO First Schedule, Part IV,Cl,2 --Disrepute to Institute (Failed to Return Books) (M13E, P17M, N17M,
733.0 N18M, M16M)
CA. X, a practicing Chartered Accountant, failed to return the books of account and other documents of
ABC Ltd. despite many reminders from the company. The company had settled his entire fees dues also.

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CNO First Schedule, Part IV,Cl,2 --Disrepute to the Institute (Quid Pro (N11E, P17M, N17M)
735.0 Quo)
CA. X, a practicing Chartered Accountant, failed to return the books of account and other documents of
ABC Ltd. despite many reminders from the company. The company had settled his entire fees dues also.
OR
CA Raj, a Chartered Accountant in practice approached Manager of a Nationalised Bank for a loan of Rs.
36 lakhs. He has also informed the Manager that if the loan is sanctioned, the Income Tax return of the
Manager and Manager’s wife will be filed for free of cost, as quid Pro quo for the loan sanctioned.
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CNO First Schedule, Part IV,Cl,2 --Disrepute to the Institute (RCM Misappropriation ) (P17M)
736.0
Mr. R, a Chartered Accountant in practice has been elected as the treasurer of a Regional Council of the
Institute. The Regional Council had organized an international tour through a tour operator during the
year for its members. During the audit of the Regional Council, it was found that Mr. R had received a
personal benefit of ` 50,000 from the tour operator.
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CNO First Schedule, Part IV,Cl,2 --Disrepute to the Institute (Use of Influence on Get (N10E, S17M, P17M,
737.0 Loans) M19M)
YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a bank.
YKS used his influence for getting some cheques purchased and thereafter failed to repay the
loan/overdraft.
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737.01 First Schedule, Part IV,Cl,2 --Disrepute to the Institute (Other Work by Article) (N18R,N19R)
CA Kumar who is contesting Central Council Elections of Institute, engages his Articled Assistant for his
election campaigning promising him that he will come in contact with influential people which will help to
enhance his career after completion of his training period.
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CNO Second Schedule, Part I, Cl,1 --Confidentiality Breached While giving (N10R, M14R, S17M, P17M)
738.0 Information to Bank
XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the financial statements of the
company notices that you are the auditor and requests you to call at the bank for a discussion. In the
course of discussions, the bank asks for your opinion regarding the company and also asks for detailed
information regarding a few items in the financial statements. The information is available in your working
paper file. What should be your response and why?
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It is very common mistake made by students that they don’t refer relevant SA’s. They only refer the clauses
of professional ethics while solving professional ethics question. Brief of relevant applicable standards
should also by provided by students, because the answers provided by institute also contains such
reference but in an “inconsistent manner”. That’s why only few questions have reference of relevant SA’s.
Like wherever there is breach of confidentiality you should refer SA 200 also.

CNO Second Schedule, Part I, Cl,1 --Confidentiality Breached While (M04E, N14E, N16R, S17M,
739.0 Presenting Paper P17M)
Mr. Parekh, a Chartered Accountant was invited by the Chamber of Commerce to present a paper in a
symposium on the issues facing Indian Leather Industry. During the course of his presentation he shared
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compete with other countries at international level
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CNO Second Schedule, Part I, Cl 3 Financial Forecast (P17M)
740.0
Z, a Chartered Accountant, certifies a financial forecast of his client which was forwarded to the client’s
bank based on which the bank sanctioned a loan to the client.
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CNO Second Schedule, Part I, Cl,3 --Financial Forecast (Certified) (M05E, M17E)/ (N18M)
741.0
L, a chartered accountant prepares and certifies projected financial statements of his client Abacus Ltd.
Abacus Ltd. forwarded the same to their banks to secure some loans and bank, on that basis sanctioned a
loan.
OR
Lily, a chartered accountant prepares and certifies projected financial statements of his client Amazon
Ltd. Amazon Ltd. forwarded the same to their banks to secure some loans and bank, on that basis
sanctioned a loan
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CNO Second Schedule, Part I, Cl 3 --Financial Forecast (Does Not Vouch) (M14E, P17M, N16M)
742.0
Mr. 'E', a practicing Chartered Accountant, was requested by one of his clients to prepare a projection for
next five years and also a report on the same. Mr. 'E' after having prepared the same stated in his report
‘The sources of information, the basis of forecasts and also the major assumptions made in arriving at the
forecasts. He also stated that he does not vouch for the accuracy of the forecasts.
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CNO Second Schedule, Part I, Cl,3 --Financial Forecast (Offered) (M08E, M16R, P17M, S17M)
743.0
As a Chartered Accountant in practice, you are asked to conduct a review of the "Profit Forecast" prepared
by a Company in connection with its application for a Term loans from a bank
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CNO Second Schedule, Part I, Cl 4 --Evaluation of Cost is Not Giving (N04E, N08R, N14E, P17M, M18E)
744.0 Opinion on Financial Statements
A firm of Chartered Accountants was appointed by a company to evaluate the costs of the various products
manufactured by it for its information system. One of the partners of the firm was a Non-Executive
Director of the company.
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CNO Second Schedule, Part I, Cl 4 --Not Covered in Definition of Relative (N12E, P17M)
745.0
Mr. A has been appointed statutory auditor of a private limited company where his spouse’s sister's
husband is having 75% ownership
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CNO Second Schedule, Part I, Cl 4 Substantial Interest by Relative (Brother) (M09E, P17M)
746.0
P, a Chartered Accountant in practice, accepts appointment as statutory auditor for LMN Pvt. Ltd. Q,
brother of P has substantial interest in LMN Pvt. Ltd.
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CNO Second Schedule, Part I, Cl 4 --Substantial Interest by Relative (Wife) (M04E, P17M)
747.0
Mr. Shah, a Chartered Accountant certified the financial statements of a company in which his wife is a
Director holding substantial interest.
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CNO Second Schedule, Part I, Cl 5 --Irregularities in pension fund (N06E, M13M, N16R, P17M, N18M)
748.0
The superannuation-cum-pension fund for the employees of a company was under a separate ‘trust’. Both
the company and the trust were under the same management. The auditor, who was auditing the
accounts of the company as well as the trust noted some irregularities in the operation of the trust and
commented upon these irregularities in the confidential report given to the trustees but did not mention
about these irregularities in his report on the Annual accounts of the Trust.
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CNO Second Schedule, Part I, Cl 5 --Loan from PF Fund (M04E, P17M)
749.0
Mr. Joe, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to know that the
company has taken a loan of 10 lakhs from Employees Provident Fund. The said loan was not reflected in
the books of account. However, the auditor ignored this information in his report
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CNO (748/749)
Students can also mention Clause 6, Part 1, Second Schedule if it is assumed that such irregularity is a
material misstatement. However, assumptions taken must be clearly stated.
CNO Second Schedule, Part I, Cl,5 --Loan from PF Fund (M09E, N11E, S17M, P17M, N18E,
750.0 (Communicated to Trustees but Not Reported) M18E, M19M)
In the course of his audit assignment in M/s Bailey Ltd., CA Soft came to know that the company, due to
financial crunch and unable to meet employee’s salary, has taken a loan of Rs 50 lacs from Employees
Gratuity Fund. The said loan was not reflected in the book of account of the company and the auditor
ignored this transaction in his report.
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CNO Second Schedule, Part I, Cl 6 --False information to Tax (N07E, M11R, N13R, M17E, P17M,
753.0 Authorities S17M, N18E, N18M)
A practicing Chartered Accountant was appointed to represent a company before the tax authorities. He
submitted on behalf of his client’s certain information and explanations to the authorities, which were
found to be false and misleading.
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Here it is assumed CA was not aware that facts were incorrect and misleading. You can take other
assumption and write alternative answer possible.
This question has been answered as per Professional Ethics. Look for CNO 378.10 in “Liabilities of Auditor”
for similar question when it is specifically asked to answer as per Income Tax Act.
CNO Second Schedule, Part I, Cl,6 Orders Under Negotiation (M15R, P17M)
754.0
Mr. Brainy, a Chartered Accountant in practice, is the auditor of Fair Ltd. He advised the Managing Director
of the company to include ‘orders under negotiation’ in sales, to reflect higher profit and better financial
position for obtaining bank loans in future. Mr. Brainy, thereafter, gave clean reports on the balance sheet
prepared accordingly without examining the accounts.
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CNO Second Schedule, Part I, Cl,7 –Audit Report Not Filed Within Time (M13E, N17M, P17M, S17M, N18R,
755.0 N19R)
CA Dev, a practicing Chartered Accountant, did not complete his work relating to the audit of the accounts
of a company and had not submitted his audit report in due time to enable the company to comply with
the statutory requirements
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CNO Second Schedule, Part I, Cl,7 –Failed to Discover Fraud which was (N10R, M14R, P17M, M18E)
756.0 expected to be detected
The Cashier of a company committed a fraud and absconded with the proceeds thereof. This happened
during the course of the accounting year. The Chief Accountant of the company also did not know about
fraud.
In the course of the audit, at the end of the year, the auditor failed to discover the fraud. After the audit
was completed, however, the fraud was discovered by the Chief Accountant. Investigation made at that
time indicates that the auditor did not exercise proper skill and care and performed his work in a desultory
and haphazard manner. With this background, the Directors of the company intend to file disciplinary
proceedings against the auditor.
Discuss the position of the auditor with regard to the disciplinary proceedings.
OR
You were the statutory auditor of Speed Ltd., a PSU, for the year 2016-17. In the course of your audit, you
did not observe any fraud having been committed during that year. However, the C & AG audit staffs
during their routine inspection found that chief cashier of the Company have committed a fraud in Debtor
s ledger and absconded with the amount. Investigation made in the fraud revealed that the Auditor did
not exercise proper skill and care and performed his work in an improper way.
Director of the Company intends to file disciplinary proceedings against the Auditor with the ICAI. Discuss
the position of the auditor with regard to the disciplinary proceedings under Chartered Accountants Act,
1949 and Regulations there to.
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CNO Second Schedule, Part I, Cl,8 --Certificate of Consumption (N10E, P17M, N18M)
757.0
Mr. Mohan is a practising Chartered Accountant. He issued a certificate of consumption which did not
reflect the correct factual position of the consumption of raw material by the concerned entity. It is found
that the certificate is given on the basis of data appearing in the minutes of meeting of the Board of
Directors.
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¾ Whenever Certification is done without collecting proper evidence . Following shall be referred-
Clause 7 Part 1 of Second Schedule
CNO Second Schedule, Part I, Cl,8 Circulation Certification (M04E, N08E, M10E, N11E, N11R, M12E,
758.0 N12M, P17M, S17M)
CA. ZZ who conducted ABC audit of a Marathi daily ‘New Era’ certified the circulation figures based on
Management Information System Report (M.I.S Report) without examining the books of Accounts.
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CNO Second Schedule, Part I, Cl,8 –No Checking as No Change in Balance (M10E, P17M, S17M, N18M)
759.0 (Investments)
Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2015-16, the
investment appeared in the Balance Sheet of the company of `10 lakhs and was the same amount as in
the last year. Later on, it was found that the company's investments were only `25,000, but the value of
investments was inflated for the purpose of obtaining higher amount of Bank loan.
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CNO Second Schedule, Part I,Cl,10 --Did not keep money is separate bank account (N06E, M17R, P17M,
760.0 N19R)
M/s XYZ a firm of Chartered Accountants received ` 2 lakhs in January, 2015 on behalf of one of their
clients, who has gone abroad and deposited the amount in their Bank account, so that they can return the
money to the client in July, 2015, when he is due to return to India.
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CNO Second Schedule, Part I, Cl,10 --Did not keep money is separate bank account (For (M10E, P17M)
761.0 Advance tax)
Mr. Z, a practicing Chartered Accountant, received a sum of `1 lac on 1.9.2014 from a Client who intends
to leave abroad for a period of a year, with a request that his advance tax liabilities to be paid over the
three instalments. On 15th September 2014, 15th December 2014 and 15th March, 2015. After remitting
the 1st instalment of advance tax on 15.9.2014, Z did not keep the Balance Money in a separate Bank
account and he is of the opinion he will remit the money within reasonable time as per payment schedule
of Advance tax
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CNO Second Schedule, Part I, Cl,10 --Did not keep money is separate bank account (N14E, N16M, P17M,
762.0 (For Advance tax, Adjusted with Fees Outstanding) M19M)
M/s . ABC, a firm of Chartered Accountants received ` 2 lakhs in March, 2014 from a client to pay the
Advance Tax. However, the firm has used that money for its own purpose and later on adjusted the same
with the outstanding fee payable.
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CNO Second Schedule, Part I,Cl,10 --Did not keep money is separate bank account (M04E, P17M, S17M)
763.0 (No Investment Made)
A charitable institution entrusted ` 10 lakhs with its auditor’s M/s Ram and Co., a Chartered Accountant
firm, to invest in a specified security. The auditors pending investment of the money, deposited it in their
Savings bank account and no investment was made in the next three months.
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CNO Second Schedule, Part I, Cl,10 –Using Client Money For Own Purpose (N14R, P17M, M18E)
764.0
Mr. Ram, a Chartered Accountant in practice, received ` 15,00,000 on 15th December 2014 on behalf of
one of his clients, who has gone to USA. Mr. Ram deposited the said amount in his saving bank account
(SB Account). As per instruction of the client, the said amount is to be returned to the client on March 31,
2015 when he will return to India. On the occasion of birthday of his wife Sita, Mr. Ram withdrew ` 5,00,000
and spent on Birthday party. He re-deposited ` 5,00,000 in the said SB account on 25th March 2015 and
then returned the entire amount of ` 15,00,000 to the client on March 31, 2015.
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CNO Second Schedule, Part II, Cl,1 –Loan for Articleship (M05E, N14E, P17M)
765.0
M/s. ABC, a firm of Chartered Accountants has taken a loan for acquiring computers, from a company
whose Managing Directors’ son is an Articled Trainee with A, a partner of M/s ABC.
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Author’s Note
# Mistake point
¾ Direct Interest -CA will be Guilty
If loan taken from article
If loan is taken from proprietorship or partnership firm in which article is proprietor or
partner
If loan is taken from company in which article has substantial shareholding
¾ Indirect Interest (Due to relationship) -CA will be Guilty

If loan is taken from proprietorship or partnership firm in which article’s father is
proprietor or partner
If loan is taken from company in which article’s father has substantial shareholding.
¾ However, If there is some connection as given in this question but indirect interest cannot be
proved, write conditional answer taking assumptions regarding interest of article. If assumed that:
Article has indirect interest – Guilty
Article has no indirect interest – Not Guilty

CNO Second Schedule, Part II, Cl,1 Stipend Payment (N12R, N15R, N17E, P17M,
766.0 N18M)
CA. X is a chartered accountant in practice. He has an articled trainee H. X has informed H that since his
practice and receipt of fees is seasonal, the stipend would not be paid in the months of April to December,
but would be paid from January to March and the shortfall for the earlier 9 months will be made good in
these 3 months along with interest @ 5% p.a.
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CNO Second Schedule, Part II, Cl,3 --False Information to Council about Article Attending (M12E, P17M)
768.0 College
A Chartered Accountant in practice had confirmed in the application made by his articled clerk to the
Council for permission to study that the normal working hours of his office were 11 a.m. to 6 p.m. and the
hours during which the articled clerk was required to attend college classes were 7 a.m. to 9.30 a.m. On
inquiry from Principal of College, it was ascertained that the articled clerk used to attend classes from 10
a.m. to 1.55 p.m. The Chartered Accountant pleaded ignorance about the articled clerk attending the
college classes during office hours. Will the Chartered Accountant be held guilty of professional
misconduct?
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Institute has provided an alternative solution also , however as per author it should not be an alternative
solution but shall form part of the answer. Following clauses shall be mentioned:
¾ Clause (1) of Part II of Second Schedule – As CA has contravened with the provisions of the Act or
regulation.
¾ Schedule II, Part II, Clause (3) - CA has provided false information to the institute regarding the
office hours of article assistant .
CNO Second Schedule, Part II, Cl,3 --False Information to Council about Article, Where (M16M, N17M, N18M,
769.0 article was employed at company N19M)
A Chartered Accountant in practice certified in requisite Form that an articled assistant was undergoing
training with him, whereas, he was also employed in a company between 10 a.m. and 6 p.m. on a monthly
salary of Rs. 17,000 and attended the office of the Chartered Accountant thereafter until 7 p.m. The
Chartered Accountant pleaded that the articled assistant was on audit of the company.
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Schedule II, Part II, Clause (3) shall also be mentioned as CA must have provided false information to the
institute regarding the office hours of article assistant.
CNO Second Schedule, Part II, Cl,3 Included name of CA in empanelment (N07E, N08R, M11R, N13R, M16E,
770.0 without his knowledge N16M, P17M, N18R, M18M)
AB & Co., a firm of Chartered Accountants, included the name of P as a partner while filing an application
for empanelment as auditor for Public Sector bank branches. It was subsequently noticed that on the date
of application, P was not a partner with AB & Co
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It’s a misconduct of second schedule part II clause 3 because empanelment for branch audits is done by
ICAI not individual banks. Application was made to ICAI. If false information is given in tender ,
empanelment to other parties then first schedule part III clause 3 would have been applicable.
COUNCIL GENERAL GUIDELINE 2008

Author’s Note
Common for answers related to Council Guidelines 2008
Clause (1) of Part II of Second Schedule is not mentioned by the institute in any of the answers related to Council
Guidelines 2008. Module also maintains the institute’s view.
However, if the students want to include additional reference they can also mention the clause below:
“As per Clause (1) of Part II of Second Schedule, a member of the institute will be held guilty of professional
misconduct if he contravenes any of the provisions of this act or regulations made thereunder or any guidelines
issued by the council”
CNO Audit Fees Progressive Basis (N08R, M09E, M11R, P17M)

771.0
D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s ABC, a partnership firm, has
received the audit fees of ` 25,000 on progressive basis in respect of the tax audit for the year ended
31.3.2015. The audit report was, however, signed on 25.5.2015.
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CNO Previous Audit Fees Unpaid, Sick Unit (N05E, N16E, P17M)
772.0
Mr. C accepted the statutory audit of M/s PSU Ltd., whose net worth is negative for the year 2013-14. The
audit was to be conducted for the year 2014-15. The audited accounts for the year 2014-15 showed liability
for payment of tax audit fees of ` 15,000 in favour of Mr. E, the previous auditor.
OR
Mr C accepted the statutory audit of M/s PSU Ltd, whose net worth is negative for the year 2007-08 The
audit was to be conducted for the year 2008-09 The audited accounts for the year 2008-09 showed liability
for payment of tax audit fees of Rs15,000 in favour of Mr E, the previous audito
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CNO Fees from Other Assignments (N05E, M07E, M09R, P17M)
773.0
A is the auditor of Z Ltd., which has a turnover of ` 200 crore. The audit fee for the year is fixed at ` 50
lakhs. During the year, the company offers an assignment of management consultancy within the meaning
of Section 2(2)(iv) of the CA Act, 1949 for a remuneration of ` 1 crore. A seeks your advice on accepting the
assignment.
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CNO Minimum Fees (N05E, M09R, M09E, N15E, P17M,

774.0 M19M)
M/s LMN, a firm of Chartered Accountants having 5 partners accepts an audit assignment of a newly
formed private limited company for audit fees of ` 5,000.
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Council General Guidelines 2008 which talks about the minimum audit fee in respect of Audit has
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CNO Council General Guideline 2008--Tax Audit Limit (S17M)
774.01
A member of the institute shall not accept in a year more than the specified number of tax audits under
section 44AB of the Income Tax Act.
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Mr. Gaurav is a partner in M/s. XYZ & Co., a firm of Chartered Accountants with 6 partners. During the
assessment year 2015-16, Mr. Gaurav alone had signed 290 tax audit reports consisting of both corporate
and non-corporate assesses.
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CNO Not Maintaining Books of Accounts (Not Exceeding (M05E, N05E, M07E, M09R, N16R, M16R, S17M,
776.0 44AA Limit) P17M, M18R, N18E)
L, a chartered accountant did not maintain books of account for his professional earnings on the ground
that his income is less than the limits prescribed u/s 44AA of the Income Tax Act, 1961.
OR
L, a chartered accountant did not maintain books of account for his professional earnings on the ground
that his income is less than the limits prescribed u/s 44AA of the Income Tax Act, 1961. (P17M)
OR
CA. Elegant is in practice for two years and runs his proprietorship firm in the name of “Elegant & Co.”. He
maintains notes in his mobile in which he writes the fees received from various clients. Based on his record,
he prepares and files his income tax return.
OR
Write a short note on Record of Audit Assignments (as required by ICAI regulations)
OR
Mr. X, a Chartered Accountant in Practice filed his income tax return for the Assessment Year 2018-19
under section 44ADA of the Income Tax Act, 1961, declaring his income on presumptive basis. In a
disciplinary proceeding against him for an alleged misuse of funds of his clients, it was asked that he
should submit his books of accounts for the financial year ended on 31/03/2018. Mr. X refused to submit
books of accounts on the ground that he had not maintained any books and even for income tax
"$%, 6:
purposes, he submitted his Return of Income on a presumptive basis. Is he right in putting such a
defence? Analyze the issues in the light of Professional Code, if any
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CNO Excessive Fees (M13R, N15R, M17M, P17M, M18M)

779.0
MNC Pvt. Ltd. appointed CA. Posh for some professional assignments like company’s ROC work,
preparation of minutes, statutory register etc. For this, CA. Posh charged his fees depending on the
complexity and the time spent by him on each assignment. Later on, MNC Pvt. Ltd. filed a complaint
against CA. Posh to the Institute of Chartered Accountants of India (ICAI) that he has charged excessive
fees for the assignment’s comparative to the scale of fees recommended by the Committee as well as duly
considered by the Council of ICAI.
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Author’s Note
Minimum fees were prescribed in council guidelines 2008 however these minimum fees are discontinued
from 2011.As on today CA institute is not having any mandatory minimum or maximum fees.
Recommendatory fees is given in annexures of tax audit guidance notes, however being recommendatory
in nature Chartered Accountants may or may not follow it.
CNO Fundamental Principles & Threats (N16E)

780.0
What are the fundamental principles as per code of ethics of ICAI? What are the threats involved while
complying with the fundamental principles?
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CA institute has done mistake while drafting this question.

Fundamental principles are described in detail under heading of threats, so some part of the answer has
been scratched to remove this inconsistency.
"$%, 6:P
Further the correct answer to the threats involved while complying with the fundamental principles is as
followed
¾ Self-interest threats, which occur when an auditing firm, its partner or associate could benefit
from a financial interest in an audit client
¾ Self-review threats, which occur when during a review of any judgement or conclusion reached in
a previous audit or non-audit engagement, or when a member of the audit team was previously
a director or senior employee of the client.
¾ Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a client’s
opinion to a point where people may believe that objectivity is getting compromised,
¾ Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests
¾ Intimidation threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism.

CNO Self Interest VS Self Review (M18E)
780.01
Distinguish Self-interest threat from self-review threat in an Assurance Engagement.
As per Code of Ethics of ICAI

¾ Self Interest Threat: +
!

$

-

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¾ Self-Review Threat: $ +

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Examples of circumstances that may create self -review threats

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CNO Engagement specific safeguards for threats (M19E)
780.05
A professional accountant in public practice is always subject to various threats in compliance with
fundamental principles of his profession and you, as a professional accountant, is worried about
engagement specific threat in your audit assignment of M/s Soft Ltd. and want to implement some
measures to eliminate and reduce the same. Enumerate some engagement specific safeguards which you
may introduce in your work environment to ward off such threats.
"$%, 6L7
¾ Engagement-specific safeguards in the work environment may include
- /an independent third party, such as a committee of independent directors+
/ !)!

Discussing ethical issues with those charged with governance

Disclosing to those charged with governance of the client the nature of services provided
and extent of fees charged.
,$$/ additional professional accountant $ %
$
!
,$$/another firm to perform or re-perform part of the engagement.
Rotating senior assurance team personnel.

CNO KYC (N14E, M17M, P17M, M18E,
782.0 M18M)
Write a short note on Importance of KYC requirements for a Chartered Accountant's practice.
As per KYC Norms of Council of ICAI
Requirement of KYC Norms

¾ Importance of KYC Requirements for a Chartered Accountant’s Practice:

$
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CNO Internal Audit + GST Audit (M19R)
782.01
WCP & Co LLP are the internal auditors of DEF Ltd. WCP & Co LLP also agreed to undertake Goods and
Service Tax (GST) Audit of DEF Ltd simultaneously.
¾ -
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OTHER
CNO Cut-off Procedures (M09R, M12M, M13R, M14R,

784.0 P17M)
Cut-off Procedures.
Answer ¾ Definition:-

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¾ Commonly affected Area:
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CNO Adjustments as per SEBI (N17E)

786.0
As an auditor of DEF Ltd., you notice certain differences in the figures between the books of account and
the 'Offer document' for the proposed issue of securities. The company explains that the same is due to
certain adjustments as per the SEBI (Disclosure and Investor Protection) Guidelines. What are such
disclosures and adjustments to be incorporated in the financial statements included in the 'Offer
document'?
Answer ¾ Disclosures and Adjustments to be incorporated in the Financial Statements included in the
Offer Document:
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Qualification Adjustment: .C

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Past period Adjustment: . ,-1# #/ + /
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Harmonisation Adjustment: ( )

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Revaluation Adjustment5 ) )

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$ $

Author’s Note
PA adjust for HER
P- Past period Adjustment / A-Adjustment of Qualifications / H- Harmonisation Adjustment /
E- Extra ordinary item Adjustment / R- Revaluation Adjustment

"$%, 6L8
MISCELLANEOUS

CNO Ind AS (Applicability) (N17E,N18M,M19M,N19E)
268
As an auditor of a company registered under section 8 of the Companies Act, 2013 you find that as
per the notification of the Ministry of Corporate Affairs regarding applicability of Indian According
Standards (Ind-AS), the company has to prepare its financial statements for the year ended 31st March,
2019 under Ind-AS.
The management of the company is however of the strong view that being a section 8 company having
charitable objects, Ind-AS cannot apply to the company. The financial statements are therefore prepared
by the management under the earlier GAAP and a note for the same is given in the financial statements.
How would you report on these financial statements ?
¾ Applicability of IND AS:
Section 129(1) of the Companies Act, 2013, governs the requirements to be satisfied by
financial statements.
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section 133 and section 129 of the Companies Act, 2013


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CA FINAL I PAPER 3 - Corporate Governance Issues in LODR

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CA FINAL I PAPER 3 - Corporate Governance Issues in LODR

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x CNO – Concept Number.

o Practice Material & Study Material

CORPORATE GOVERNANCE AUDIT

CNO Corporate Governance (N04E, N11R, M13M, M14R, M15R, P17M)

Matters in LODR: - ,

, -  4$

   !  !   / / 

 +   

 /  

 /+       

 /+! 

     

(Start of the year)

During the year)

¾ Composition of Risk Management Committee:

(During the year)

CNO Audit Committee (Power) (M17M)

(Communication with AC)

 /  +

¾ $  /+ / +  ! 

11.Review Auditors 12. Recommendation for Appointment of Statutory

Application Financial Financial Statutory Auditor

&'  

(Incorporate Companies Act)

CNO Management Discussion and Analysis. (N13E, S17M, P17M, N17R)

CNO LODR (Regulation 36) (M18M)

CNO Independent Director (N18E, M19M, N19R)

CNO Obligations of Directors & Senior Management (M19E)

       !

(Review Compliance Reports)

(Liability of Independent Director)

 %/+  ) ) /0 

        0  / 

CNO Verification of composition of Board under Regulation 17 (M19E)

.   '

AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

CNO Applicability (M17M) / (N18R)

 / +

CNO Temporary Holding ( AS & IND AS - (N19E)

Companies (Accounts) Rules, 2014,

 / *$+

 / +  ) 

Acounting Standard 21 “Consolidated Financial Statements”, states that

 /  6 F-   2 

Control to be considered Temporary & AS 13

  

 / ,$  G

Certain things that auditor should verify

As per Ind AS 110 “Consolidated Financial Statements”, states

AS 21 “Consolidated Financial Statements”

CNO Temporary Holding( AS) (M6E,M8E,M15E ,M16M,P17M,S17M, M18M,N18M,N18R)

Companies (Accounts) Rules, 2014,

 / *$+

 / +  ) 

Acounting Standard 21 “Consolidated Financial Statements”, states that

 /  6 F-   2 

Control to be considered Temporary & AS 13

  

 / ,$  G

Certain things that auditor should verify

CNO Temporary Holding (IND AS) (M17E)

¾ Companies Act, 2013

Matters in LODR: - ,

,- 4$

! ! //

+

/

/+

/+!

During the year)

/ +

¾ $/+ / + !

&'

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%/+ ) ) /0

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/ 6 F- 2

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(Adjustments) -T $! C )! $

/

subsequent acquisition of shares in the components, disposal of the

/

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(Intra group balances) - / ) =

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+

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complete financial information from components=

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(d) Auditing . 2 +

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¾ Credit Card Accounts:-

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¾ Bills Purchased and Discounted:0

¾ Securitisation: ) ". !

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¾ Advances under Consortium: - $

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