Audit Must Do List!! (Nov - 2021) - 211128 - 234249

BY : VINIT MISHRA SIR
ALL INDIA RANK - 04 4
ARUL KUMAR
(STUDENT OF TOP-20)
10 ALL INDIA RANK -10
MEGHANA SAWAKAR
(STUDENT OF TOP-20)
INDEX
C. NO. CHAPTER NAME PAGE NO.
1. NATURE, OBJECTIVE AND SCOPE OF AUDIT 1–5
2. AUDIT STRATEGY, AUDIT PLANNING & AUDIT PROGRAMME 6–9
3. AUDIT DOCUMENTATION AND AUDIT EVIDENCE 10 – 14
4. RISK ASSESSMENT AND INTERNAL CONTROL 15 – 18
5. FRAUD AND RESPONSIBILITIES OF THE AUDITOR 19 – 23
6. AUDIT IN AN AUTOMATED ENVIRONMENT 24 – 27
7. AUDIT SAMPLING 28 – 30
8. ANALYTICAL PROCEDURES 31 – 33
9. AUDIT OF ITEMS OF FINANCIAL STATEMENT 34 – 37
10. COMPANY AUDIT 38 – 41
11. AUDIT REPORTS 42 – 45
12. AUDIT OF BANKS 46 – 50
13. AUDIT OF DIFFERENT TYPES OF ENTITIES 51 – 54
14. STANDARDS ON AUDITING 55 – 56

NATURE, OBJECTIVE AND
SCOPE OF AUDIT
QUESTIONS AND ANSWERS

Q.1: The person conducting audit should take care to ensure that financial statements
would not mislead anybody. Explain stating clearly rate meaning of Auditing.
[RTP May 20]
ANSWER:
Meaning of Audit:
“An audit is independent examination of financial information of any entity, whether profit oriented
or not, and irrespective of its size or legal form, when such an examination is conducted with a view
to expressing and option thereon.” From this definition, following main points emerge:
1. Audit is Independent examination of financial information.
2. Audit may be carried out of all entities, may be profit oriented or not and irrespective of its size
or legal form. For example, listed company engaged in business and Sec. 8 company which is a
non-profit organization, both are required to get the accounts audited under Companies Act,
2013.
3. The objective of the audit is to express an option on the financial statements.
Points to be ensured that F.S. not misled anybody:
Auditor engaged to perform the task of performing audit need to ensure the following:
(a) Ledger balances agree with entries made in the books of account.
(b) Sufficient and Appropriate evidences are available for entries made in books of account.
(c) All transactions are being recorded in books of account, i.e. there is no omission.
(d) Information contained in the financial statements is clear and unambiguous.
(e) Amounts shown in financial statements are properly classified, described and disclosures are made
in conformity with applicable Accounting Standards.
(f) Financial statements reflect true and fair view of financial results and financial position.
Q.2: State the objectives of Audit according to SA-200 [RTP May 20]
ANSWER:
Objectives of Audit:
(a) The objective of an audit of financial statements, prepared within a framework of recognised
accounting policies and practices and relevant statutory requirements, if any, is to enable an
auditor to express an opinion on such financial statements.
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(b) The auditor’s opinion helps determination of the true and fair view of the financial position
and operating results of an enterprise.
(c) The user, however, should not assume that the auditor’s opinion is an assurance as to the future
viability of the enterprise or the efficiency or effectiveness with which management has conducted
the affairs of the enterprise.
(d) Auditor should review and assess the conclusions drawn from the audit evidence obtained and
from his knowledge of business of the entity as the basis for the expression of his opinion on the
financial information.
Q.3: SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It
sells its finished products both in the domestic as well as in the international market. The
company is making total turnover of ₹30 crores. It has also availed cash credit limit of ₹ 3
crores from Dena Bank. In the year 2020 -21. Proprietor of the firm is worried about the
financial position of the company and is under the impression that since he is out of India,
therefore firm might not run well. He approaches an Internal Auditor about as to what would
be covered in Audit. Advise regarding principal aspects (any four) to be covered in getting
accounts audited. [MTP-March 19]
ANSWER:
Aspects to be covered in Audit:
1. Examination of Accounting System & Internal control
 To ascertain whether it is appropriate for the business and helps in proper recording of all
the transaction.
 To determine the Nature, Timing and Extent (NTE) of Audit Procedure to be performed.
2. Reviewing the system & procedures
 To find out whether they are adequate and comprehensive.
3. Vouching of the transactions
 To ensure authenticity and validity of transactions.
 To check the arithmetical accuracy of the books of account.
 To ascertain proper distinction into capital and revenue items.
4. Verification of Assets & Liabilities
 To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.
5. Statutory compliances
 In case of entities governed by some law, rules or regulations, for example in case of audit
of a company incorporated under Companies Act, 2013.
6. Expression of Opinion
 On true and fair view of state of Affairs as reflected by Balance Sheet.
 On true and fair view of Financial Results as reflected by Statement of Profit and loss.
 On true and fair view of Cash Flows as reflected by Cash Flow Statement.
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7. Reporting on other matters
 As required by the law governing the entity.
Q.4: There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain with examples. [RTP May 20, MTP Oct, 20]
ANSWER:
Audit limitations as to the nature of audit procedures:
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example:
(1) There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor.
(2) Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an
intentional misstatement that involves, for example, collusion to falsify documentation which
may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither
trained as nor expected to be an expert in the authentication of documents.
(3) An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
Q.5: DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments
for the financial year 2020 – 21. After the completion of the audit, there were found material
misstatements due to fraud in the financial statements which were not noticed and reported
by the auditor. Management alleges that it is failure on the part of auditor. Comment.
[MTP Oct. 20]
ANSWER:
Management allegation as to auditor’s failure to detect material misstatements:
As per SA-200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Standards on Auditing” the auditor is not expected to, and cannot, reduce audit risk
to zero and cannot therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent limitations of an audit,
which result in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
As per SA-240, the responsibility for the prevention and detection of fraud and error rests with
management through the implementation of an adequate system of internal control. Such a system
reduces but does not eliminate the possibility of fraud and error. Auditor’s responsibility for failure to
detect fraud and error can arise only use to proven negligence.
The relevant provisions in this regard are:
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(a) In forming his opinion, the auditor carries out procedure designed to obtain evidence that will
provide reasonable assurance that the financial information’s properly stated in all material
respects.
(b) Due to the inherent limitation of an audit there is a possibility that material misstatements of the
financial information resulting from fraud or error may not be detected. An auditor cannot be
charged for non-adherence of basic principles in the following circumstances:
 Subsequent discovery of material misstatement of the financial information resulting from
fraud of error;
 Failure to disclose the affairs of the company kept out of books and concealed from him.
Unless it is proved that procedures undertaken by auditor in the circumstances are inadequate and
improper.
Thus, if any misstatement has been detected after the completion of the audit, the same by itself cannot
mean that the auditor did not perform his duty properly.
If the auditor can prove with the help of his papers (documentation) that he has followed adequate
procedures necessary for the proper conduct of an audit, he cannot be held responsible for the same.
Q.6: The objective of the IAASB is to serve the public interest by setting high quality auditing
standards and by facilitating the convergence of international and national standards,
thereby enhancing the quality and uniformity of practice throughout the world and
strengthening public confidence in the global auditing and assurance profession. State how
this objective is achieved. [MTP-March 18, March 19]
ANSWER:
Role of International Auditing & Assurance standard Board (IAASB)
The IAASB functions as an independent standard -setting body under the auspices of IFAC. The
objective of the IAASB is to serve the public interest by setting high quality auditing standards and by
facilitating the convergence of international and national standards, thereby enhancing the quality and
uniformity of practice throughout the world and strengthening public confidence in the global auditing
and assurance profession, The IAASB achieves this objective by:
(a) Establishing high quality auditing standards and guidance for financial statement audits that are
generally accepted and recognized by investors, auditors, governments, banking regulators,
securities regulators and other key stakeholders across the world;
(b) Establishing high quality standards and guidance for other types of assurance services on both
financial and non-financial matters;
(c) Establishing high quality standards and guidance for other related services;
(d) Establishing high quality standards for quality control covering the scope of services addressed by
the IAASB; and
(e) Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance services
providers.
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Q.7: As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement
partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned. Explain clearly stating the meaning of engagement partner and
also the action of the engagement partner and appropriate message to the other members
of the engagement team, in taking responsibility for the overall quality on each audit
engagement. [RTP Nov. 20]
ANSWER:
Leadership Responsibilities for Quality on Audits:
As per SA 220 “Quality Control for an Audit of Financial Statements” the engagement partner shall
take responsibility for the overall quality on each audit engagement to which that partner is assigned.
As a part of this responsibility Engagement Partner should emphasizes the following to the engagement
Team (ET):
 Compliance with professional Standards and legal requirements.
 Compliance with firm’s quality Control Policies and procedures as applicable.
 Issuance of appropriate audit report.
 Ability to raise concerns without fear.
 Quality is essential & indispensable in engagement performance.
Meaning of Engagement Partner:
The partner or other person in the firm who is a member of the Institute of Chartered Accountants of
India and is in full time practice and is responsible for the engagement and its performance, and for
the report that is issued on behalf of the firm, and who, where required, has the appropriate authority
from a professional, legal or regulatory body.
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AUDIT STRATEGY, AUDIT PLANNING & AUDIT
PROGRAMME

Q.1: “The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Plans should be based on knowledge of the client’s business”
Discuss stating clearly the broad points you would be covering in framing plan to conduct
audit in an efficient and effective manner. [MTP – March 18, March 19]
ANSWER:
Points to be covered in Framing audit plan:
 Planning in auditing encompasses developing an overall plan for the expected scope and conduct
of the audit and developing an audit programme showing the nature, timing and extent (NTE) of
audit procedures.
 The audit planning is necessary to conduct an effective audit in an efficient and timely manner.
 SA-300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan
an audit of financial statements.
 Plan should be made to cover, among other things:
(a) Acquiring knowledge of the client’s accounting systems, policies and internal control
procedures;
(b) Establishing the expected degree of reliance to be placed on internal control;
(c) Determining and programming the nature, timing, and extent of the audit procedures to be
performed; and
(d) Coordinating the work to be performed.
Q.2: Explain the benefits of Planning in the audit of financial statements. [RTP-May 19]
ANSWER:
Usefulness of Careful and Adequate Audit Planning:
i To ensure that appropriate attention is devoted to important areas of the audit: This is
done through formal written audit plan, laying down the objectives and the procedures to be
followed in order to meet those objectives.
ii To facilitate review: Work should be delegated to staff with the appropriate level of experience.
All work should be properly supervised and reviewed by a senior member of Staff.
iii To ensure that potential problems are identified: The auditor must ensure that resources are
directed towards material/high risk areas.
iv To assist in the proper assignment of work: This may be to members of the audit team or to
experts or other auditors. It helps the audit to proceed in a timely and efficient manner.
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v Coordination or work done by auditors of components and experts.
Q.3: Knowledge of the Client’s business is one of the important principles in developing an
overall audit plan. In fact without adequate knowledge of client’s business, a proper audit is
not possible. As per SA-315, “Identifying and Assessing the Risk of Material Misstatement
through Understanding the Entity and its Environment”, the auditor shall obtain an
understanding of the relevant industry, regulatory and other external factors including the
applicable financial reporting framework. Substantiate with the help of examples.
[RTP-May 20]
ANSWER:
Examples of industry, regulatory and other external factors including the applicable FRF:
1. The competitive environment, including demand, capacity, product and price competition as well
as cyclical or seasonal activity.
2. Supplier and customer relationships, such as types of suppliers and customers (e.g.,, related parties,
unified buying groups) and the related contracts with those entities.
3. Technological developments, such as those related to the entity’s products, energy supply and
cost.
4. The effect of regulation on entity operations
Q.4: As a result of unexpected events, changes in conditions, or the audit evidence obtained
from the results of audit procedures, the auditor may need to modify the overall audit
strategy and audit plan. Explain. [RTP Nov. 19]
ANSWER:
Changes to Planning decisions:
 The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit. The auditor may need to modify the overall audit strategy and
audit plan as a result of:
1. Unexpected events.
2. Change in conditions, or
3. The audit evidence obtained from the results of audit procedures.
 Based on the revised consideration of assessed risks, auditor need to modify the nature, timing
and extent of further audit procedures. This may be the case when information comes to the
auditor’s attention that differs significantly from the information available when the auditor
planned the audit procedures. For example, audit evidence obtained through the performance of
substantive procedures may contradict the audit evidence obtained through tests of controls.
Q.5: Your firm has been appointed as an auditor to audit the accounts of an auto parts
manufacturer, ABC Ltd. Elucidate the matters to be considered by an auditor in developing
his overall plan for the expected scope and conduct of audit. [MTP Oct 20]
ANSWER:
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Factors to be considered in development of overall plan:
 Terms of his engagement and any statutory responsibilities.
 Nature and timing of reports or other communications.
 Applicable Legal or Statutory requirements.
 Accounting policies adopted by the clients and changes, if any, in those policies.
 The effects of new accounting and auditing pronouncement on the audit.
 Identification of significant audit areas.
 Setting of materiality levels for the audit purpose.
 Conditions requiring special attention such as the possibility of material error or fraud or
involvement of parties in whom directors or persons who are substantial owners of the entity are
interested and with whom transactions are likely.
 Degree of reliance to be placed on the accounting system and internal control.
 Possible rotations of emphasis on specific audit areas.
 Nature and extent of audit evidence to be obtained.
 Work of the internal auditors and the extent of reliance on their work, if any in the audit.
 Involvement of other auditors in the audit of subsidiaries or branches of the client and
involvement of experts.
 Allocation of works to be undertaken between joint auditors and the procedures for its control
and review.
 Establishing and coordinating staffing requirements.
Q.6: Evidence is the very basis for formulation of opinion and an audit programme is
designed to provide for that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales. [RTP May 20]
ANSWER:
Audit Programme – Designed to provide Audit Evidence:
 Evidence is the very basis for formulation of opinion and an audit programme is designed to
provide for that by prescribing procedures and techniques.
 What is best evidence for testing the accuracy of any assertion is a matter of expert knowledge
and experience. This is the primary task before the auditor when he draws up the audit
programme.
 Transactions are varied in nature and impact; procedures to be prescribed depend on prior
knowledge of what evidence is reasonably available in respect of each transaction.
 Example Sales are evidenced by:
1. invoices raised by the client;
2. price list;
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3. forwarding notes to client;
4. inventory-issue records;
5. sales managers’ advice to the inventory section;
6. Acknowledgements of the receipt of goods by the customers; and collection of money against
sales by the client.
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AUDIT DOCUMENTATION AND AUDIT EVIDENCE

Q.1: Judging the significance of a matter requires an objective analysis of the facts and
circumstances. Documentation of the professional judgements made, where significant,
serves to explain the auditor’s conclusions and to reinforce the quality of the judgment.
Explain with the help of example. [RTP-May 19]
ANSWER:
Documentation of Significant Matters and Related Significant Professional Judgments.
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Examples of significant matters include:
1. Matters that give rise to significant risks (as defined in SA 315).
2. Results of audit procedures indicating (a) that the financial statements could be materially
misstated, or (b) a need to revise the auditor’s previous assessment of the risks of material
misstatement and the auditor’s responses to those risks.
3. Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
4. Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis
of Matter paragraph in the auditor’s report.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to
those responsible for reviewing audit documentation, including those carrying out subsequent audits,
when reviewing matters of continuing significance.
Examples of circumstances in which it is appropriate to prepare audit documentation
relating to the use of professional judgment
 The rationale for the auditor’s conclusion when a requirement provides that the auditor ‘shall
consider certain information or factors, and that consideration is significant in the context of the
particular engagement.
 The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgements (For
example, the reasonableness of significant accounting estimates).
 The basis for the auditor’s conclusions about the authenticity of a document when further
investigation (such as making appropriate use of an expert or of confirmation procedures) is
undertaken in response to conditions identified during the audit that caused the auditor to believe
that the document may not be authentic.
Q.2: Auditing is a logical process. An auditor is called upon to assess the actualities of the
situation, review the statements of account and give an expert opinion about the truth and
fairness of such accounts. This he cannot do unless he has examined the financial
statements objectively. He needs evidence to obtain information for arriving at his
judgment. Discuss explaining clearly the detailed meaning of audit evidence.
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[RTP-Nov. 19]
ANSWER:
Audit Evidence:
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review
the statements of account and give an expert opinion about the truth and fairness of such accounts.
This he cannot do unless he has examined the financial statements objectively. Auditor requires audit
evidences to obtain information for arriving at his judgment.
Meaning of Audit Evidence:
 SA 500 “Audit Evidence” defines audit evidence as information used by the auditor in arriving at
the conclusions on which the auditor’s opinion is based.
 Audit evidence includes both information contained in the accounting records underlying the
financial statements and information obtained from other sources.
 Accounting records include the records of initial accounting entries and supporting records, such
as checks and records of electronic funds transfers; invoices; contracts; the general and subsidiary
ledgers, journal entries and other adjustments to the financial statements that are not reflected in
journal entries; and records such as work sheets and spreadsheets supporting cost allocations,
computations reconciliations and disclosures.
 Other information which the auditor may use as audit evidence includes, for examples minutes of
the meetings, written confirmation from trade receivables and trade payables, manuals containing
details of internal control, annual reports etc. A combination of tests of accounting records and
other information is generally used by the auditor to support his opinion on the financial
statements.
Q.3: Sufficiency is the measure of the quantity of audit evidence. The quantity of audit
evidence needed is affected by the auditor’s assessment of the risks of misstatement and
also by the quality of such audit evidence. Obtaining more audit evidence, however, may not
compensate for its poor quality. Explain also stating the factors affecting auditor’s judgment
as to sufficiency of audit evidence. [RTP Nov 20]
ANSWER:
Sufficient appropriate audit evidence:
SA 500 defines audit evidence as information used by the auditor in arriving at the conclusions on
which the auditor’s opinion is based. The auditor shall design and perform audit procedures that are
appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Sufficiency: It refers to the quantity of audit evidence. It is affected by the auditor’s assessment of the
risks of material misstatement and also by the quality of such audit evidence.
Appropriateness: It refers to the measure of the quality of audit evidence. That is its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
Factors affecting Sufficiency and Appropriateness:
(a) The degree of risk of misstatement which may be affected by factors such as:
 The nature of the item:
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 The adequacy of internal control;
 The nature or size of the business carried on by the entity;
 Situations which may exert an unusual influence on management;
 The financial position of the entity.
(b) The materiality of the item.
(c) The experience gained during previous audits.
(d) The results of auditing procedures, including fraud and errors which may have been found.
(e) The type of information available.
(f) The trend indicated by accounting ratios and analysis.
Q.4: “The nature and timing of the audit procedures to be used be affected by the fact that
some of the accounting data and other information may be available only in electronic form
or only at certain points or periods in time”. Explain. [RTP Nov. 20]
ANSWER:
Factors affecting nature and timing of Audit Procedure:
As per SA 500 “Audit Evidence” audit procedures performed to collect audit evidences include the
following:
a) Risk assessment procedures
b) Further Audit procedures: It comprises of
1. Test of controls, and
2. Substantive Procedures: consists of –
 Tests of Details,
 Substantive Analytical Procedures
Nature and timing of audit procedures affected by:
 Availability of audit evidence in electronic form only.
 Availability of audit evidence at certain points/ periods in time.
For example, source documents, such as purchase orders and invoices, may exist only in electronic
form when an entity uses electronic commerce, or may be discarded after scanning when an entity
uses image processing systems to facilitate storage and reference.
Certain electronic information may not be retrievable after a specified period of time, for example,
if files are changed and if backup files do not exist. Accordingly, the auditor may find it necessary
as a result of an entity’s data retention policies to request retention of some information for the
auditor’s review or to perform audit procedures at a time when the information is available.
Q.5: A higher level of assurance may be sought about the operating effectiveness of controls
when the approach adopted consists primarily of tests of controls. Explain and also state
when will the auditor design and perform tests of controls to obtain sufficient appropriate
audit evidence as to the operating effectiveness of relevant controls. [RTP Nov. 20]
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ANSWER:
Performing Test of controls:
 As per SA 330 “Responses to Assessed Risks” tests of controls may be defined as audit procedure
designed to evaluate the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
 The auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls when:
(a) He expects that the controls are operating effectively, or
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
 In designing and performing tests of controls, the auditor shall:
(a) Perform other audit procedures in combination with inquiry to obtain audit evidence about
the operating effectiveness of the controls, including:
i How the controls were applied at relevant times during the audit.
ii The consistency with which they are applied.
iii By whom or by what means they were applied.
(b) Determine whether the controls to be tested depend upon other controls (indirect controls)
and if so, whether it is necessary to obtain audit evidence supporting the effective operation
of those indirect controls.
Q.6: Explain clearly objective of the auditor regarding written representation.

[RTP Nov. 19]
ANSWER:
written representation:
 SA 580 “Written Representation” defines the term as a written statement by management
provided to the auditor to confirm certain matters or to support other audit evidence.
 Written representations in this context do not include financial statements, the assertions therein
or supporting books and records.
 Written representation are necessary information that the auditor requires in connection with the
audit, hence they are recognised as audit evidence as a response to inquiries.
 Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
 Auditor requires the written representation from the management to support other audit evidence
relevant to the Financial Statements or specific assertions in the Financial Statements.
Objective of auditor regarding written representation:
(a) To obtain written representations from management that management believes that it has fulfilled
the fundamental responsibilities that constitute the premise on which an audit is conducted:
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(b) To support other audit evidence relevant to the financial statements or specific assertions in the
financial statements by means of written representations, if determined necessary by the auditor
or required by other SAs; and
(c) To respond appropriately to written representations provided by management or if management
does not provide the written representations requested by the auditor.
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RISK ASSESSMENT AND INTERNAL CONTROL

Q.1: When auditor identifies deficiencies and report on internal controls, he determines the
significant financial statement assertions that are affected by the ineffective controls in
order to evaluate the effect on control risk assessments and strategy for the audit of the
financial statements. Explain. [RTP May 20]
ANSWER:
Control risk assessment when control deficiencies are identified:
 When auditor identifies deficiencies and report on internal controls, he determines the significant
financial statement assertions that are affected by the ineffective controls in order to evaluate the
effect on control risk assessments and strategy for the audit of the financial statements.
 When control deficiencies are identified and auditor identifies and tests more than one control
for each relevant assertion, he evaluates control risk considering all of the controls auditor has
tested. If auditor determines that they support a ‘rely on controls’ risk assessment, or if
compensating controls are identified, tested and evaluated to be effective, he may conclude that
the ‘rely on controls’ is still appropriate. Otherwise we change our control risk assessment to ‘not
rely on controls.’
 When a deficiency relates to an ineffective control that is the only control identified for an
assertion, he revises risk assessment to ‘not rely on controls’ for associated assertions, as no other
controls have been identified that mitigate the risk related to the assertion. If the deficiency relates
to one WCGW (what can go wrong) out of several WCGW’s, he can ‘rely on controls’ but
performs additional substantive procedures to adequately address the risks related to the
deficiency.
Q.2: For the purpose of Identifying and assessing the risks of material misstatement, the
auditor shall identify risks throughout the process of obtaining an understanding of the
entity and its environment. Explain in detail along with other relevant points. [RTP Nov. 20]
ANSWER:
Identifying and assessing the risks of material misstatement:
 The auditor shall identify and assess the risks of material misstatement at:
A. The financial statement level –
B. The assertion level for classes of transactions, account balances, and disclosures to provide a
basis for designing and performing further audit procedures
 For the purpose of Identifying and assessing the risks of material misstatement, the auditor shall:
a) Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes
of transactions, account balances, and disclosures in the financial statements;
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b) Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
c) Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
d) Consider the like likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that could result in
a material misstatement.
Q.3: Obtaining an understanding of the entity and its environment, including the entity’s
internal control, is a continuous, dynamic process of gathering, updating and analysing
information throughout the audit. Analyse and explain giving examples. [RTP-May 20]
ANSWER:
Understanding of the Entity – a continuous process:
Obtaining an understanding of the entity and its environment, including the entity’s internal control,
is a continuous, dynamic process of gathering, updating and analysing information throughout the
audit. The understanding establishes a frame of reference within which the auditor plans the audit and
exercises professional judgment throughout the audit, for example, when:
1. Assessing risks of material misstatement of the financial statements;
2. Determining materiality in accordance with SA 320;
3. Considering the appropriateness of the selection and application of accounting policies;
4. Identifying areas where special audit consideration may be necessary, for example, related party
transactions, the appropriateness of management’s use of the going concern assumption, or
considering the business purpose of transactions;
5. Developing expectations for use when performing analytical procedures;
6. Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management’s oral and written representations.
Q.4: The risks of material misstatement may exist at the financial statement level and
assertion level. Explain the two levels. [RTP Nov. 20]
ANSWER:
Risks of Material Misstatement
The risks of material misstatement may exist at two levels:
(i) The overall financial statement level- Risks of material misstatement at the overall financial
statement level refer to risks of material misstatement that relate pervasively to the financial
statements as a whole and potentially affect many assertions.
(ii) The assertion level for classes of transactions, account balances, and disclosures-Risks
of material misstatement at the assertion level are assessed in order to determine the nature,
timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit
16
evidence. This evidence enables the auditor to express an opinion on the financial statements at
an acceptably low level of audit risk.
Q.5: Much of the information obtained by the auditor’s inquiries is obtained from
management and those responsible for financial reporting. However, the auditor may also
obtain information, or a different perspective in identifying risks of material misstatement,
through inquiries of others within the entity and other employees with different levels of
authority. Explain with the help of examples. [RTP Nov. 20]
ANSWER:
Inquiries of Management and Others within the Entity:
Much of the information obtained by the auditor’s through inquiry from management and others.
However, the auditor also obtain information, or a different perspective in identifying risks of material
misstatement, through inquiries of others within the entity and other employees with different levels
of authority.
For example:
1. Inquiries directed towards those charged with governance may help the auditor understand the
environment in which the financial statements are prepared.
2. Inquiries directed toward internal audit personnel may provide information about internal audit
procedures performed during the year relating to the design and effectiveness of the entity’s
internal control and whether management has satisfactorily responded to findings from those
procedures.
3. Inquiries of employees involved in initiating, processing or recording complex or unusual
transactions may help the auditor to evaluate the appropriateness of the selection and application
of certain accounting policies.
4. Inquiries directed toward in-house legal counsel may provide information about such matters as
litigation, compliance with laws and regulations, knowledge of fraud or suspected fraud affecting
the entity.
5. Inquiries directed towards marketing or sales personnel may provide information about changes
in the entity’s marketing strategies, sales trends, or contractual arrangements with its customers.
Q.6: Internal control over safeguarding of assets against unauthorised acquisition, use, or
disposition may include controls relating to both financial reporting and operations
objectives. Explain stating clearly the objectives of internal Control. [RTP May 20]
ANSWER:
Internal Control over safeguarding of assets:
Internal control over safeguarding of assets against unauthorised acquisition, use, or disposition may
include controls relating to both financial reporting and operations objectives. The auditor’s
consideration of such controls is generally limited to those relevant to the reliability of financial
reporting. For example, use of access controls, such as passwords, that limit access to the data and
programs that process cash disbursements may be relevant to a financial statement audit. Conversely,
17
safeguarding controls relating to operations objectives, such as controls to prevent the excessive use
of materials in production, generally are not relevant to a financial statement audit.
Objectives of Internal Control:
(a) Transactions are executed in accordance with managements general or specific authorization;
(b) All transactions are promptly recorded in the correct amount in the appropriate accounts and in
the accounting period in which executed so as to permit preparation of financial information
within a framework of recognized accounting policies and practices and relevant statutory
requirements, If any and to maintain accountability for assets;
(c) Assets are safeguarded from unauthorised access, use or disposition; and
(d) The recorded assets are compared with the existing assets at reasonable intervals and appropriate
action is taken with regard to any differences.
18
FRAUD AND RESPONSIBILITIES OF THE
AUDITOR

Q.1: “Fraudulent financial reporting involves intentional misstatements including omissions
of amounts or disclosures in financial statements to deceive financial statement users.”
Discuss. [MTP Oct. 19]
ANSWER:
Fraudulent Financial reporting:
 As per SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” the
auditor is concerned with fraud that causes a material misstatement in the financial statements.
Misstatement may result from fraudulent financial reporting or from misappropriation of assets.
 Fraudulent financial reporting involves intentional misstatements including omissions of amounts
or disclosures in financial statements to deceive financial statements users. Fraudulent financial
reporting may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of events,
transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
 Fraudulent financial reporting often involves management override of controls that otherwise
may appear to be operating effectively.
Q.2: Detection of manipulation of accounts with a view to presenting a false state of affairs
is a task requiring great tact and intelligence. Explain stating clearly how this type of fraud
is generally committed. [RTP Nov. 19]
ANSWER:
Manipulation of Accounts:
Detection of manipulation of accounts with a view to presenting a false state of affairs is a task
requiring great tact and intelligence because generally management personnel in higher management
cadre are associated with this type of fraud and this is perpetrated in methodical way. This type of
fraud is generally committed.
(a) To avoid incidence of income-tax or other taxes;
(b) For declaring a dividend when there are insufficient profits;
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(c) To withhold declaration of dividend even when there is adequate profit (this is often done to
manipulate the value of shares in stock market to make it possible for selected persons to acquire
shares at a lower cost); and
(d) For receiving higher remuneration where managerial remuneration is payable by reference to
profits.
Q.3: Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively. Explain the techniques used to commit
fraud by management overriding controls. [MTP Oct. 20]
ANSWER:
Fraudulent Financial Reporting:
As per SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” the
auditor is concerned with fraud that causes a material misstatement in the financial statements
Misstatement may result from fraudulent financial reporting or from misappropriation of assets.
The various ways in which misstatements may be caused from fraudulent financial reporting are:
1. Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
2. Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
3. Omitting, advancing or delaying recognition in the financial statements of events and transactions
that have occurred during the reporting period.
4. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
5. Engaging in complex transactions that are structure to misrepresent the financial position or
financial performance of the entity.
6. Altering records and terms related to significant and unusual transactions.
Q.4: Discuss the different ways in which defalcation of cash may take place. [RTP-May19]
ANSWER:
Defalcation of cash:
Cash may be defalcated in following ways:
1. Inflating cash payments: by
 Making payments against fictitious vouchers.
 Making payments against vouchers, the amounts whereof have been inflated.
 Manipulating totals of wage by including names of dummy workers in wage rolls.
 Over casting for petty cash expenditure.
2. Suppressing cash receipts: by
 Teeming and Lading
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 Adjusting unauthorised rebates, allowances, discounts etc. to customer’ accounts and
misappropriating amount paid by them.
 Writing off as debts in respect of balances against which cash his already been received but
has been misappropriated.
 Not accounting for cash sales fully.
 Not accounting for miscellaneous receipts e.g. sale of scrap etc.
 Writing down assets values in entirety, selling them subsequently and misappropriating the
proceeds.
3. By casting wrong totals in the cash book.
Q.5: Explain how would you deal as an auditor if, as a result of a misstatement resulting from
fraud or suspected fraud, you encounter exceptional circumstances that bring into question
your ability to continue performing the audit. [RTP-May 19, Nov. 20]
ANSWER:
Auditor Unable to Complete the Engagement:
If the auditor concludes that it is not possible to continue performing the audit as a result of a
misstatement resulting from fraud or suspected fraud, the auditor should:
i Consider the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities;
ii Consider the possibility of withdrawing from the engagement; and
iii If the auditor withdraws:
 Discuss with the appropriate level of management an TCWG, the auditor’s withdrawal from
the engagement and the reasons for the withdrawal; and
 Consider whether there is a professional or legal requirement to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Q.6: As per sub-section (12) of section 143 of the Companies Act, 2013, if an auditor of a
company in the course of the performance of his duties as auditor, has reason to believe
that an offence of fraud involving such amount or amounts as may be prescribed, is being
or has been committed in the company by its officers or employees, the auditor shall report
the matter to the Central Government within such time and in such manner as may be
prescribed.
In this regard, Rule 13 of the Companies (Audit and Auditors) Rules, 2014 has been
prescribed. Sub-rule (1) of the said rule states that if an auditor of a company, in the course
of the performance of his duties as statutory auditor, has reason to believe that an offence
of fraud, which involves or is expected to involve individually an amount of ₹ 1 crore or
above, is being or has been committed against the company by its officers or employees,
the auditor shall report the matter to the Central Government.
Explain the manner of reporting the matter to the Central Government in the above context.
21
[RTP Nov 20]
ANSWER:
Manner of Reporting of Fraud:
Rule 13 of companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds
as below:
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor,
has reason to believe that an offence of fraud, which involves or is expected to involve
individually an amount of ₹ 1 crore or above, is being or has been committed against the
company by its officers or employees, the auditor shall report the matter to the CG.
(2) The auditor shall report the matter to the CG as under:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may
be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply
or observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply
or observations of the Board or the Audit Committee along with his comments (on such
reply or observations of the Board or the Audit Committee) to the Central Government
within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government along with a note containing the details of his report that was earlier
forwarded to the Board or the Audit Committee for which he has not received any reply
or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address
and contact telephone number or mobile number and be signed by the auditor with his seal
and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4
(3) In case of a fraud involving amount less than ₹ 1 Cr., the auditor shall report the matter to Audit
Committee constituted u/s 177 or to the Board immediately but not later than 2 days of his
knowledge of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description:
(b) Approximate amount involved: and
(c) Parties involved.
(4) The following details of each of the fraud reported to the Audit Committee or the Board under
sub-rule (3) during the year shall be disclosed in the Board’s Report:
(a) Nature of fraud with description;
(b) Approximate amount involved;
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(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
23
AUDIT IN AN AUTOMATED ENVIRONMENT

Q.1: The fundamental principle of an automated environment is the ability to carry out
business with less manual intervention, Explain. [MTP-March 19]
ANSWER:
Automated Environment:
 Automated environment refers to a business environment where the processes, operations,
accounting and decision are being carried out by using computer systems- also known as
Information Systems (IS) or Information Technology (IT) systems.
 Fundamental principle of an automated environment is the ability to carry out business with less
manual intervention and more system driven.
 The complexity of a business environment depends on the level of automation i.e., if a business
environment is more automated, it is likely to be more complex. For example, if a company uses
an integrated enterprise resource planning system (ERP) viz., SAP, Oracle etc., then it is considered
more complex to audit. On the other hand, if a company is using an off-the-shelf accounting
software, then it is likely to be less automated and hence less complex environment.
Key features of Automated Environment:
 Faster Business Operations.
 Accuracy in Data processing and computation.
 Ability to process large volume of data.
 Integration between business operations.
 Better security and controls.
 Less prone to human errors.
 Provides latest information.
 Connectivity and networking capability.
Q.2: Discuss the situations in which IT will be relevant to an audit. [RTP-May 19]
ANSWER:
Relevance of IT in auditing:
In an automated environment, carrying out audit using traditional substantive audit procedures may
be difficult or even not feasible if the company prepares, records and conducts majority of business
activities through IT systems only.
Auditor is required to obtain an understanding of IT environment of the company and document the
same. While carrying out audit in an automated environment, auditors are required to understand,
assess and respond to such risks that arise from the use of IT systems.
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Situations requiring use of IT in Audit:
(a) Increased use of Systems and Application software in Business (For example, use of ERP’s)
(b) Increased complexity of business transactions (Multiple systems, network of systems)
(c) Technology based business (Telecom, e-Commerce).
(d) High volume of transactions (insurance, Banking, etc.).
(e) Company Policy (Compliance).
(f) Regulatory requirements - IT Act, 2008.
(g) Requirement of Standards of Auditing – SA 315.
(h) Increases efficiency and effectiveness of audit.
Q.3: With the increasing adoption of information technology, business today relies on
software systems and applications more than ever. Many of these IT systems generate and
process data that is used in the preparation of financial statements of a company. The
auditors also often rely on the data and reports that are generated from these systems.
Explain stating clearly the meaning of Automated environment with example. [RTP Nov 20]
ANSWER:
Concept of Automated Environment:
 With the increasing adoption of information technology, business today relies on software systems
and applications more than ever. Many of these IT systems generate and process data that is used
in the preparation of financial statements of a company.
 Auditors also often rely on the data and reports that are generated from these systems. In this
context, it is critical to understand the IT specific risks that could potentially impact the integrity
and reliability of financial transactions and data flowing through a company’s systems.
 An automated environment basically refers to a business environment where the processes,
operations, accounting and even decisions are carried out by using computer systems – also known
as Information Systems (IS) or Information Technology (IT) systems. Nowadays, it is very common
to see computer systems being used in almost every type of business.
Example
Carrying out of banking transactions using ATMs (Automated Teller Machines), or purchasing of tickets
using “apps” on mobile phones, etc. Computer systems enable these transactions at any time and any
day.
Q.4: Explain some of the commonly used methods for testing in an automated environment.
a[RTP May 20]
ANSWER:
Commonly used methods for testing in an automated environment:
1. Obtain an understanding of how an automated transaction is processed by doing a walkthrough
of one end-to-end transaction using a combination of inquiry, observation and inspection.
25
2. Observe how a user processes transactions under different scenarios.
3. Inspect the configuration defined in an application.
4. Inspect the system logs to determine any changes made since last audit testing.
5. Inspect technical manual/user manual of systems and applications.
6. Carry out a test check and observe the error message displayed by the application.
Q.5: Data analytics can be used in testing of electronic records and data residing in IT
systems using spreadsheets and specialised audit tools viz., IDEA and ACL to perform
check completeness of data and population that is used in either test of controls or
substantive audit tests. Explain in detail stating all the relevant points.
[RTP May 20, MTP Oct.20]
ANSWER:
Concept of Data Analytics:
 Data analytics is an analytical process by which meaning information is generated and prepared
from raw system data using processes, tools, and techniques.
 In an automated environment, various insights can be extracted from operational, financial, and
other forms of electronic data internal or external to the organization.
 The data so extracted is useful for preparation of management information system (MIS) reports
and electronic dashboards that give a high-level snapshot of business performance.
 The data analytics methods used in an audit are known as computer Assisted Auditing Techniques
or CAAT’s
 Data analytical can be used in testing of electronic records and data residing in IT system using
spreadsheets and specialised audit tools viz., IDEA and ACL.
Application of Data Analytics.
 In an automated environment, auditors can apply the concept of data analytics for several aspects
of an audit including the following:
 Check completeness of data and population that is used in either test of controls or substantive
audit tests.
 Selection of audit samples – random sampling, systematic sampling,
 Re-computation of balances – reconstruction of trial balance from transaction data.
 Reperformance of mathematical calculations – depreciation, bank interest calculation.
 Analysis of journal entries as required by SA 240.
 Fraud investigation.
 Evaluating impact of control deficiencies.
Q.6: With respect to audit in an automated environment, explain the following:

(a) CAAT’s
26
(b) Data Analytics
(c) Database
(d) Information Systems
(e) Privileged Access [MTP May 20]
ANSWER:
Meaning of Terms used in Automated Environment:
a) CAAT’s: Computer Assisted Audit Techniques – Collection of computer – based tools and
techniques that are used in an audit for analysing data in electronic form to obtain audit evidence.
b) Data Analytics: Data analytics is an analytical process by which meaning information is generated
and prepared from raw system data using processes, tools, and techniques.
c) Database: A logical sub-systems within a larger Information system where electronic data is
stored in a predefined form and retrieved for use.
d) Information System (IT): Collection of electronic hardware, software, networks and processes
that are used in a business to carry out operations and transactions.
e) Privileged access: A type of super user access to information system that enforces less or no
limits on using that system.
27
AUDIT SAMPLING

Q.1: There is a growing realisation that the traditional approach to audit is economically
wasteful because all efforts are directed to check all transactions without exception.
Explain. [RTP Nov. 19]
ANSWER:
Limitations of traditional Approach:
 There is a growing realization that the traditional approach to audit is economically wasteful
because all efforts are directed to check all transactions without exception.
 Traditional Approach: In traditional approach, more emphasis put on routine checking, which
often is not necessary considering the time and the cost involved. In routine checking auditor
considers detailed checking and vouching of all entries.
 With the passage of time, formal internal controls are being introduced in the management of
affairs of organisation, due to which the possibilities of routine errors and frauds have greatly
diminished and auditors often find extensive routine checking as nothing more than a ritual
because it rarely reveals anything material.
 Risk Based approach: Audit approach, now a days, has undergone considerable changes and
the extent of checking are undergoing a progressive change in favour of more attention towards
the questions of principles and controls with a curtailment of non-consequential routine checking.
Q.2: Audit testing done through Statistical sampling is more scientific than testing based
entirely on the auditor’s own judgment because it involves use of mathematical laws of
probability in determining the appropriate sample size in varying circumstances. Explain
and also state advantages of Statistical sampling. [MTP Oct. 20]
ANSWER:
Advantages of Statistical Sampling:
Audit testing done through Statistical sampling is more scientific than testing based entirely on the
auditor’s own judgment because it involves use of mathematical laws of probability in determining
the appropriate sample size in varying circumstances. Statistical sampling has reasonably wide
application where a population to be tested consists of a large number of similar items and more in
the case of transactions involving compliance testing, trade receivables’ confirmation, payroll checking,
vouching of invoice and petty cash vouchers.
The advantages of statistical sampling may be summarized as follows:
1. The amount of testing (sample size) does not increase in proportion to the increase in the size of
the area (universe) tested.
2. The sample selection is more objective and thereby more defensible.
28
3. The method provides means of estimating the minimum sample size associated with a specified
risk & precision.
4. It provides a means for deriving a “calculated risk” and corresponding precision (sampling error)
i.e. the probable difference in result due to the use of sample in lieu of examining all the records
in the group (universe), using the same audit procedures.
5. It may provide a better description of a large mass of data than a complete examination of all the
data. Since non-sampling errors such as processing and clerical mistakes are not as large.
Q.3: Discuss the factors that should be considered for deciding upon the extent of checking
on a sampling plan. [RTP-May 19]
ANSWER:
Factor to be considered to decide extent of checking:
A. Factors Influencing extent of checking for tests of Controls:
i An increase in the extent to which the auditor’s risk assessment takes into account relevant
controls will increase the sample size.
ii An increase in the tolerable rate of deviation, will decrease the sample size.
iii An increase in the expected rate of deviation of the population to be tested, will increase the
sample size.
iv An increase in the auditor’s desired level of assurance that the tolerable rate of deviation is
not exceeded by the actual rate of deviation in the population will increase the sample size.
B. Factors influencing extent of checking for Tests of Details:
i An increase in the auditor’s assessment of the risk of material misstatement will increase the
extent of checking.
ii An increase in the use of other substantive procedures directed at the same assertion will
decrease the extent of checking.
iii An increase in the auditor’s desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the population will increase the extent of checking.
iv An increase in tolerable misstatement will decrease the extent of checking.
v An increase in the amount of misstatement the auditor expects to find in the population will
increase the extent of checking.
vi Stratification of the population when appropriate will decrease the extent of checking.
Note: Simplified answer as given in Suggested Answers of ICAI is as below:
The factors that should be considered for deciding upon the extent of checking on a sampling plan
are following.
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
29
(v) Degree of the desired confidence.
Q.4: Explain the sampling method which involves selection of a block(s) of contiguous items
from within the population. Also given example. [RTP May 20]
ANSWER:
Block Selection:
 This method involves selection of a block(s) of contiguous items from within the population.
 Block selection cannot ordinarily be used in audit sampling because most populations are
structured such that items in a sequence can be expected to have similar characteristics to each
other, but different characteristics from items elsewhere in the population.
 In some circumstances it may be an appropriate audit procedure to examine a block of items, it
would rarely be an appropriate sample selection technique when the auditor intends to draw
valid inferences about the entire population based on the sample.
Example Take the first 500 purchase invoices from the purchase day book in the month of October;
alternatively take any blocks of 50 purchase invoice. Therefore, once the first item in the block is
selected, the rest of the block follows items to the completion.
Q.5: The auditor is required to project misstatements for the population to obtain a broad
view of the scale of misstatement. Explain. [RTP-May 19]
ANSWER:
Projection of Misstatements:
 As per SA 530 “Audit Sampling”, the auditor is required to project misstatements for the
population to obtain a broad view of the scale of misstatement but this projection may not be
sufficient to determine an amount to be recorded.
 When a misstatement has been established as an anomaly it may be excluded when projecting
misstatement to the population. However, the effect of any such misstatement, if uncorrected,
still needs to be considered in addition to the projection of the non-anomalous misstatements.
 For tests of details, the auditor shall project misstatements found in the sample to the population
whereas for tests of controls, no explicit projection of deviations is necessary since the sample
deviation rate is also the projected deviation rate for the population as a whole.
30
ANALYTICAL PROCEDURES

Q.1: In the planning stage, analytical procedures assist the auditor understanding the
client’s business and in identifying areas of potential risk. Explain. [RTP-Nov. 20]
ANSWER:
Use of Analytical Procedures in Planning Stage:
 In the planning stage, analytical procedures assist the auditor in understanding the client’s business
and in identifying areas of potential risk by indicating aspects of and developments in the entity’s
business of which he was previously unaware.
 This information will assist the auditor in determining the nature, timing and extent of his other
audit procedures.
 Analytical procedures in planning the audit use both financial data and non-financial information,
such as number of employees, square feet of selling space, volume of goods produced and similar
information.
Q.2: Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time. Explain. [RTP-Nov. 18, MTP-April19]
ANSWER:
Predictability of Substantive Analytical Procedure:
 SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as substantive
procedures. As per SA 520, substantive analytical procedures are generally more applicable to
large volumes of transactions that tend to be predictable over time.
 The application of planned analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to the contrary. However, the
suitability of a particular analytical procedure will depend upon the auditor’s assessment of how
effective it will be in detecting a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statement to be materially misstated.
 In some cases, even an unsophisticated predictive model may be effective as an analytical
procedure. For Example, where an entity has a known number of employees at fixed rates of pay
throughout the period, it may be possible for the auditor to use this data to estimate the total
payroll costs for the period with a high degree of accuracy, thereby providing audit evidence for
a significant item in the financial statements and reducing the need to perform tests of details on
the payroll.
 The use of widely recognised trade ratios (such as profit margins for different types of retail
entities) can often be used effectively in substantive analytical procedures to provide evidence to
support the reasonableness of recorded amounts.
31
Q.3: Explain the techniques available while applying SAP. [RTP-May 19]
ANSWER:
Techniques available while applying SAP:
(a) Trend analysis: Trend analysis is most commonly used technique which involves comparison
of current data with the prior period balance or with a trend in two or more prior period
balances.
(b) Ratio Analysis: Ratio Analysis involves analysing revenue and capital items forming part of
balance sheet and profit and loss account. Ratios can also be compared over a period of time or
to the ratios of other entities within the industry.
(c) Reasonableness tests: Unlike trend analysis, this analytical procedure does not rely on events
of prior periods, but upon non-financial data for the audit period under consideration. These
tests are generally more applicable to income statement accounts and certain accrual or
prepayment accounts.
(d) Structural modelling: A modelling tool constructs a Statistical model from financial and /or
non-financial data of prior accounting periods to predict current account balances (e.g., linear
regression).
Q.4: The decision about which audit procedures to perform, including whether to use
substantive analytical procedures, is based on the auditor’s judgment. Explain.
[RTP Nov-20]
ANSWER:
Use of Substantive Analytical Procedures:
 The substantive procedures at the assertion level may be tests of details, substantive analytical
procedures, or a combination of both.
 The decision about which audit procedures to perform, including whether to use substantive
analytical procedures, is based on the auditor’s judgment about the expected effectiveness and
efficiency of the available audit procedures to reduce audit risk at the assertion level to an
acceptably low level.
 The auditor may inquire of management as to the availability and reliability of information
needed to apply substantive analytical procedures, and the results of any such analytical
procedures performed by the entity. It may be effective to use analytical data prepared by
management, provided the auditor is satisfied that such data is properly prepared.
Q.5: If analytical procedures performed in accordance with SA 520 identify fluctuations or

relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount, explain how would the auditor investigate such
differences. [RTP-May 19]
ANSWER:
Investigation of Identified fluctuations:
32
 If analytical procedures performed in accordance with SA 520 identify fluctuations or relationships
that are inconsistent with other relevant information or that differ from expected values by a
significant amount, the auditor shall investigate such differences by:
(a) Inquiring of management and obtaining appropriate audit evidence relevant to management’s
responses; and
(b) Performing other audit procedures as necessary in the circumstances.
 Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its environment, and
with other audit evidence obtained during the course of the audit.
 The need to perform other audit procedures may arise when, for example, management is unable
to provide an explanation, or the explanation, together with the audit evidence obtained relevant
to management’s response, is not considered adequate.
33
AUDIT OF ITEMS OF FINANCIAL STATEMENTS

Q.1: What are the obvious assertions in the following items appearing in the Financial
Statements?
(i) Statement of Profit and Loss
Travelling Expenditure ₹ 50,000
(ii) Balance Sheet
Trade receivable ₹ 2,00,000 [MTP Oct. 19]
ANSWER:
Travelling Expenditure:
 Expenditure has been incurred for the purpose of travelling.
 Travelling has been undertaken during the year under audit.
 Total expenditure incurred was ₹ 50,000 during the year.
 It is classified as revenue expenditure and charged to Statement of Profit and Loss.
Trade Receivable
 These include all sales transaction occurred during the year.
 These have been recorded properly and occurred during the year.
 These constitute assets of the entity.
 These have been shown at proper value, i.e. after showing the deduction on account of
provision for bad and doubtful debts.
Q.2: Companies prepare their financial statements in accordance with the framework of
generally accepted accounting principles (Indian GAAP), also commonly referred to as
accounting standards (AS). In preparing financial statements, Company’s management
makes implicit or explicit claims (i.e. assertions) regarding assets, liabilities, equity, income,
expenses and disclosures in accordance with the applicable accounting standards. Explain
with example stating the relevant assertions involved in this regard. Also explain financial
statement audit. [RTP May 20]
ANSWER:
Assertions involved in preparation of financial statements:
 Companies prepare their financial statements in accordance with the framework of generally
accepted accounting principles (Indian GAAP), also commonly referred to as accounting standards
(AS).
 In preparing financial statements, Company’s management makes implicit or explicit claims (i.e.
assertions) regarding:
34
1. Completeness;
2. Cut-off;
3. Existence/ occurrence;
4. Valuation/ measurement;
5. Rights and obligations; and
6. Presentation and disclosure
of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable
accounting standards.
Example: If balance sheet of an entity shows machinery with carrying amount of ` 25 lakh the auditor
shall assume that the management has claimed/ asserted that:
1. The Machinery recognized in the balance sheet exists as at the period-end (existence assertion):
2. Entity owns and controls such machinery [Rights and obligations assertion);
3. The machinery has been valued accurately in accordance with the valuation principles (Valuation
assertion);
4. All machineries owned and controlled by the entity are included within the carrying amount of
Rupee 25 lakh (Completeness assertion).
Financial Statement Audit:
A financial statement audit comprises the examination of an entity’s financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report by the
auditor, attesting to the truth and fairness of presentation of the financial statements and related
disclosures.
Q.3: Any share issued by a company at a discounted price shall be void. Explain stating also
the audit procedure in this regard. [MTP-March 19]
ANSWER:
Shares issued at a discount:
 Sec. 53 of the Companies Act, 2013 provides that a company cannot issue shares at discount. As
per Sec. 53, a company shall not issue shares at a discount, except in the case of an issue of sweat
equity shares given u/s 54 of the Companies Act, 2013.
 Any share issued by a company at a discounted price shall be void.
 Where any company fails to comply with the provisions of this section, such company and every
officer who is in default shall be liable to a penalty which may extend to an amount equal to the
amount raised through the issue of shares at a discount or ` 5 lakh, whichever is less, and the
company shall also be liable to refund all monies received with interest at the rate of 12% p.a.
from the date of issue of such shares to the persons to whom such shares have been issued.
 Auditor needs to verify that the company has not issued any of its shares at a discount. For this
purpose, he may read the minutes of meeting of its directors and shareholders authorizing issue
of share capital and the issue price.
35
Q.4: BNP Ltd. has reduced its Share Capital to a greater extent in the year for which you are
conducting the audit. State how will you proceed for verifying the reduction of Capital.
[MTP Oct .20]
ANSWER:
Reduction of Share Capital:
The duties of the auditor in this regard are following:
(i) Verifying that the special resolution has been passed for reduction of capital in the meeting of
the shareholder.
(ii) Check that the Articles of Association authorizes the reduction of capital.
(iii) Examine the order of the Tribunal confirming the reduction and ensure that a copy of the order
and the minutes have been registered and filed with the ROC.
(iv) Inspecting the ROC Certificate as regards reduction of capital.
(v) Vouching the journal entries recorded to reduce the capital and to write down the assets by
reference to the resolution of shareholders and other documentary evidence.
(vi) Ensure that the requirements of schedule III w.r.t. reduced capital have been complied with.
(vii) Confirming that the revaluation of assets have been properly disclosed in the Balance Sheet.
(viii) Verifying the adjustment made in the members’ accounts in the Register of Members and
confirming that either the paid-up amount shown on the old share certificates have been altered
or new certificates have been issued in lieu of the old, and the old ones have been cancelled.
(ix) Confirming that the words “and reduced”, if required by the order of the Tribunal, have been
added to the name of the company in the Balance Sheet.
(x) Verifying that the MOA of the company has been suitably altered.
Q.5: A significant and important audit activity is to contact banks/ financial institution s
directly and ask them to confirm the amounts held in current accounts, deposit accounts,
EEFC account, cash credit accounts, etc. as at the end of the reporting period under audit.
Explain the audit procedure in this context. [RTP Nov.20]
ANSWER:
Audit procedure for Direct Confirmation Procedure:
(a) Auditor is required to confirm all year end account balance maintained with the bank.
(b) The client should be asked to investigate and reconcile the discrepancies, if any, including seeking
written explanations/ clarifications from the banks/ financial institutions on any unresolved
queries.
(c) The auditor should emphasize for confirmation of 100% of bank account balances. In remote
situations, where no reply is received, the auditor should perform additional testing regarding
the balances. This testing could include:
 Agreeing the balance to bank statement received by the Company or internet/ online login
to account in auditor’s personal presence;
36
 Prepare a final summary of the results of the circularization and draw the final conclusion.
Q.6: Write the audit procedures to be performed as an auditor for valuation (assertion) of following:
Finished goods and goods for resale. [MTP May 20]
ANSWER:
Audit Procedures to be performed for valuation of Finished Goods and Goods for Resale:
i Ensure that the valuation of inventories is in accordance with the AS 2, “Valuation of Inventories”,
being lower of cost or Net Realisable Value.
ii Examine the evidence supporting the assessment of Net Realisable Value. In this regard, the auditor
should particularly examine whether appropriate allowance has been made for defective,
damaged and obsolete and slow -moving inventories in determining the NRV.
iii Inquire about the elements of cost and ensure that the overheads included have been determined
based on normal costs and appear reasonable.
iv Request the client to provide inventory ageing split between less than 30 days, 30 -60 days old,
60-90 days old, 90 – 180 days old, 180 – 365 days old and more than 365 days old, for the
purpose follow up for items that are obsolete, damaged, slow moving and ascertain the possible
realizable value of such items.
v Compare recorded costs with replacement costs.
vi Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is significantly
lower.
37
COMPANY AUDIT

Q.1: The first auditor of M/s Healthy Wealthy Ltd., a Government Company, was appointed
by the Board of Directors. [MTP-March 19, RTP-May 19]
ANSWER:
Appointment of First Auditor of Govt. Company
 Section 139(7) of the Companies Act, 2013 lays down that in the case of Government company
or any other company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government, or state Governments, or partly by the Central Government and
partly by one or more State Governments, the first auditor shall be appointed by the CAG of India
within 60 days of registration of the company.
 In case the CAG of India does not appoint such auditor within the said period, the BOD of the
company shall appoint such auditor within the next 30 days.
 In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform
the member of the company who shall appoint such auditor within the 60 day at an EGM.
 Hence in the case of M/s Healthy Wealthy Ltd., being a government company, the first auditors
shall be appointed by the CAG of India.
Conclusion: The appointment of first auditors made by the Board of Directors of M/s Healthy
Wealthy Ltd., is null and void.
Q.2: At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He however
resigned after 3 months since he wanted to purse his career in banking sector. The board
of director has appointed Mr. L as the statutory auditor in Board meeting within 30 days.
Comment on the matter, With reference to the provisions of companies Act. 2013.
[RTP Nov. 20]
ANSWER:
Filling of Casual vacancy:
 As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may
be filled by Board of Directors within thirty days.
 However, if Casual vacancy has been created by the resignation of the auditor, such appointment
shall also be approved by the company at a general meeting convened within three months of
the recommendation of the board.
 The auditor so appointed shall hold office till the conclusion of the next annual general meeting.
Conclusion: In this case the casual vacancy has been created on account of resignation. Therefore,
Board of Directors will have to fill the vacancy within thirty days and such appointment shall be
approved by the company at the general meeting within three months of the recommendations of
the Board. The new auditor so appointed shall hold office only till the conclusion of the next AGM.
38
Q.3: Explain the manner and procedure of selection and appointment of auditors as per Rule
3 of Companies (Audit and Auditors) Rules, 2014. [RTP-May 19]
ANSWER:
Manner and Procedures of selection and appointment of auditors:
Manner and procedure of selection of auditors by the member of the company at AGM has been
prescribed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014. Accordingly:
1. In case of a company that is required to constitute and Audit Committee u/s 177, the committee
and, in cases where such a committee is not required to be constituted the Board, shall take into
consideration the qualifications and experience of the individual or the firm proposed to be
considerest for appointment as auditor and whether such qualifications and experience are
commensurate with the size and requirements of the company.
While considering the appointment, the Audit committee or the Board, as the case may be shall
have regard to any order or pending proceeding relating to professional matters of conduct
against the proposed auditor before the ICAI or any competent authority or any Court.
2. The Audit Committee or the Board, as the case may be, may call for such other information from
the proposed auditor as it may deem fit.
3. Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit
Committee, the committee shall recommend the name of an individual or a firm as auditor to the
Board for consideration and in other cases, the Board shall consider and recommend an individual
or a firm as auditor to the members in the AGM for appointment.
4. If the Board agrees with the recommendation of the Audit Committee, it shall further recommend
the appointment of an individual or a firm as auditor to the members in the AGM.
5. If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.
6. If the Audit Committee, after considering the reason given by the Board, decides not to reconsider
its original recommendation, the Board shall record reasons for its disagreement with the
committee and send it its own recommendation for consideration of the members in the AGM;
and if the Board agrees with the recommendations of the Audit Committee, it shall place the
matter for consideration by members in the AGM.
Q.4: CA Donald was appointed as the auditor of PS Ltd. at the remuneration of ₹ 30,000.
However, after 4 months of continuing his services, he could not continue to hold his office
of the auditor as his wife got a government job at a distant place and he needs to shift along
with her to the new place. Thus, he resigned from the company and did not perform his
responsibilities relating to filing of statement to the company and the registrar indicting the
reason and other facts as may be relevant with regard to his resignation.
How much fine may he be punishable with under section 140(3) for non-compliance of
section 140(2) of the Companies Act, 2013? [RTP-May 19, MTP Oct. 19]
ANSWER:
Fine prescribed u/s 140(3) for non -compliance of Sec. 140(2):
39
 Sec. 140(2) of Companies Act, 2013 provides that the auditor who has resigned from the company
shall file within a period of 30 days from the date of resignation, a statement in the Form ADT-3
with the company and the Registrar.
 In case of Govt. companies of Govt. owned/controlled companies, the auditor shall also file such
statement with the CAG, indicating the reasons and other facts as may be relevant with regard to
his resignation.
 As per Sec. 140(3) of Companies Act, 2013, if the auditor does not comply with the provisions of
Sec. 140(2), he or it shall be liable to a penalty of ₹ 50,000 or an amount equal to the
remuneration of the auditor, whichever is less, and in case of continuing failure, with further
penalty of ₹ 500 for each day after the first during which such failure continues, subject to a
maximum of ₹ 5 lakh.
Q.5: M/s. ABC & Co. is an audit firm, having patterns CA. A, CA, B and CA. C. The firm has
been offered the appointment as an auditor of XYZ Ltd. for the financial year 2019-20.
Mr. D, the relative of CA. A, is holding 25,000 shares (face value of ₹ 10 each) in XYZ Ltd.
having market value of ₹ 90,000. Are M/s. ABC & Co. qualified to be appointed as auditors of
XYZ Ltd. [MTP May 20, RTP Nov 20]
ANSWER:
Disqualifications as to security:
 AS per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his
relative or partner holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company.
 However, the relative of the auditor may hold the securities or interest in the company face value
not exceeding of ₹ 1,00,000.
Conclusion: In the instant case ABC & Co, will be disqualified for appointment as an auditor of XYZ
Ltd. as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in XYZ Ltd. of face value
of ₹ 2,50,000 which is exceeding the limit mentioned in proviso to section 141(3) (d) (i).
Q.6: “ABC & CO.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered
Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor in 4, 6 and
10 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “ABC & Co.”
(ii) Provide the maximum number of audits remaining in the name of individual partner i.e.
Mr. A, Mr. B and Mr. C.
(iii) Can ABC & Co. accept the appointment as an auditor in 60 private companies having
paid-up share capital less than ₹ 100 Cr., which has not committed default in filing its
financial statements u/s 137 or annual return u/s 92 of Companies Act, with the
Registrar, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies
are having paid-up share capital of ₹ 110 crore each? [MTP Oct. 20]
ANSWER:
40
Celling on Number of Audit:
As per section 141 (3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment
as an auditor if he is in full time employment elsewhere of a person of a partner of a firm holding
appointment as its auditor, if such persons or partners is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies;
As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit firm
having 3 partners, the overall ceiling will be 3 x 20 = 60 company audits. Sometimes, a chartered
accountant is a partner in a number of auditing firms. In such a case, all the firms in which he is partner
or proprietor will be together entitled to 20 company audits on his account.
Conclusion:
(i) ABC & Co. can hold appointment as an auditor of 40 more companies as computed below:
Total Number of Audits available to the Firm = 20 x 3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4 + 6 + 10 = 20
Remaining number of Auditors available to the Firm = 40
(ii) Mr. A can hold: 20-4 = 16 more audits.
Mr. B can hold 20-6 = 14 more audits and
Mr. C can hold 20 – 10 = 10 more audits.
(iii) ABC & Co. can hold appointment as an auditor in all the 60 private companies having paid-up
share capital less than ` 100 crore, 2 small companies and ` dormant company as these are
excluded from the ceiling limit of company audits given under section 141 (3) (g) of the
Companies Act, 2013.
(iv) ABC & Co. can accept the appointment as an auditor for 2 small companies, 1 dormant company,
15 private companies having paid-up share capital less than ` 100 crore and 40 private companies
having paid-up share capital of ` 110 crore each in addition to above 20 company audits already
holding.
41
AUDIT REPORTS

Q.1: The auditor’s report shall include a section with a heading “Responsibilities of
Management the Financial Statements.” SA 200 explains the premise, relating to the
responsibilities of management and, where appropriate, those charged with governance,
on which an audit in accordance with SAs is conducted. Explain. [MTP-April 19]
ANSWER:
Responsibilities of Management for the Financial Statements:
As per SA 700 “Forming an Opinion & Reporting on Financial Statements: the auditor’s report shall
include a section with a heading “Responsibilities of Management of the Financial Statements.”
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the F.S. in accordance with the applicable FRF, and for such internal control as
management determines is necessary to enable the preparation of F.S. that are free from material
misstatement whether due to fraud or error; and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall include a
description of when the use of the going concern basis of accounting is appropriate.
Q.2: The Auditor is fully satisfied with the audit of an entity in respect of its systems and
procedures and wants to issue a report without any hesitations. What type of opinion can
be given and give reasoning? [MTP-April 19]
ANSWER:
Unqualified Opinion:
SA 700 “Forming an opinion and Reporting on Financial Statements” requires the auditor to express
an unqualified opinion when he concludes that the financial statements give a true and fair view in
accordance with the financial reporting framework used for preparation and presentation of the
financial statements.
An unqualified opinion indicates the following:
1. The financial statements have been prepared using the generally accepted accounting principles
and being constantly followed.
2. The financial statements comply with relevant statutory requirements and regulations.
3. All material matters relevant to proper presentation of the financial information, subject to
statutory requirement, if applicable, have been adequately disclosed.
42
Q.3: Communicating Key Audit Matter is not a substitute for disclosure in the Financial
Statements rather Communicating key audit matters in the auditor’s report is in the context
of the Auditor having formed an opinion in the financial statements as a whole. Analyse.
[RTP-May 18]
ANSWER:
Scope of SA 701:
 This SA deals with the auditor’s responsibility to communicate key audit matters in the auditor’s
report.
 Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the F.S. that the applicable FRF requires management to make,
or that are otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specified audit engagement in accordance with SA 705;
(c) A substitute for reporting in accordance with SA 570 when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity’s ability to
continue as a going concern; or
(d) A separate opinion on individual matters.
 SA 701 applies to audits of complete sets of general purpose F.S. of listed entities and circumstances
when the auditor otherwise decides to communicate key audit matters in the auditor’s report.
 SA 701 also applies when the auditor is required by law or regulation to communicate key audit
matters in the auditor’s report.
SA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an
opinion on the financial statement, unless such reporting is required by law or regulation.
Q.4: Explain clearly the purpose of communicating key audit matters. [RTP-Nov. 18]
ANSWER:
Purpose of communicating key audit matters:
As per SA 701 “Communicating key Audit matters in the Independent Auditor’s Report” Key Audit
Matters are those matters that, in the auditor’s professional judgment, were of most significance in the
audit of the F.S. of the current period. Key audit matters are selected from matters communicated
with TCWG.
Various purposes of communicating Key Audit matters as per SA 701 are:
1. To enhance the communicative value of the auditor’s report by providing greater transparency
about the audit that was performed.
2. To provide additional information to intended users of the financial statements to assist them in
understanding those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the F.S. of the current period.
3. To assist intended users in understanding the entity and areas of significant management judgment
in the audited F.S.
43
To provided a basis to further engage with management and TCWG about certain matters relating to
the entity, the audited F.S. or the auditor that was performed.
Q.5: State clearly the objective of the Auditor as per SA 706. Also define emphasis of matter
paragraph and other matter paragraph. [MTP Oct. 20]
ANSWER:
Objectives of the Auditor as per SA 706:
The objective of the auditor; having formed opinion on the financial statements, is to draw users’
attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional
communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of
such importance that it is fundamental to users’ understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities of the auditor’s report.
Definition of EOM and OM Para:
SA 706 defines the emphasis of matter paragraph as a Para included in Auditor’s Report that refers to
a matter appropriately presented/disclosed in financial statement that in the auditor’s judgment is of
such importance that it is fundamental to users’ understanding of financial statements.
SA 706 defines the other Matter paragraph as a paragraph included in the auditor’s report that refers
to a matter other than those presented or disclosed in the financial statement that, in the auditor’s
judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report.
Q.6: The nature of the comparative information that is presented in an entity’s financial
statements depends on the requirements if the applicable financial reporting framework.
There are two different broad approaches to the auditor’s reporting responsibilities in
respect of such comparative information: corresponding figures and comparative financial
statements. Explain clearly stating the essential audit reporting differences between the
approaches. Also, define comparative information and audit procedures regarding
comparative information. [RTP May 19]
ANSWER:
Meaning of Comparative Information:
 SA 710 “Comparative Information – Corresponding Figures and Comparative Financial
Statements” defines the term comparative information as the amounts and disclosures included in
the financial statements in report of one or more prior period in accordance with the applicable
FRF.
 Comparative information where amounts and other disclosures for the prior period, are included
as an integral part of current period financial statements and are intended to be read only in
relation to the amounts and other disclosures relating to the current period is known as
Corresponding Figures.
44
 Comparative information where amounts and other disclosures for the prior period, are included
for comparison with the financial statements of the current period but, if audited, are referred to
in the auditor’s opinion is known as Comparative financial statements.
Essential reporting difference:
The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial statements refers to the current
period only: whereas
(b) For comparative financial statements, the auditor’s opinion refers to each period for which
financial statements are presented.
Audit procedures regarding comparative information:
 SA 710 “Comparative Information – Corresponding Figure and Comparative Financial
Information” deals with the auditor’s responsibilities regarding comparative information in an
audit of financial statements.
 The term Corresponding Figures refer to Comparative information where amounts and other
disclosures for the prior period, are included as an integral part of current period F.S., and are
intended to be read only in relation to the amounts and other disclosures relating to the current
period.
 When corresponding figures are presented, the auditor’s opinion shall not refer to the
corresponding figures because the auditor’s opinion is on the current period financial statements
as a whole including the corresponding figures.
 When the auditor’s on the prior period, as previously issued, included a modified opinion and
the matter which gave rise to the modified opinion is resolved and properly accounted for or
disclosed in the financial statements in accordance with the applicable FRF, the auditor’s opinion
on the current period need not refer to the previous modification.
 If the auditor’s report on the prior period, as previously issued, included a modified opinion and
the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor’s
opinion on the current period’s financial statements.
 In the Basis for Modification Paragraph in the auditor’s report, the auditor shall either:
(a) Refer to both the current period’s figures and the corresponding figures in the description of
the matter given rise to the modification when the effects or possible effects of the matter
on the current period’s figures are material; or
(b) In other cases, explain that the audit opinion has been modified because of the effects or
possible effects of the unresolved matter on the comparability of the current period’s figures
and the corresponding figures.
45
AUDIT OF BANKS

Q.1: The auditor should examine the efficacy of various internal controls over advances in
case of Banks to determine the nature, timing and extent of his substantive procedures.
Explain what is included in the internal controls over advances. [RTP-May 19]
ANSWER:
Aspects of internal Control in the area of loans and advances:
To determine the nature, timing and extent of substantive procedures over advances, auditor should
examine the efficacy of various internal controls over advances.
1. Advances should be made only after evaluating creditworthiness of the borrowers and obtaining
sanction from the proper authorities of the bank.
2. All the loan documents like promissory notes, letters of hypothecation, guarantee letter, etc.
should be executed by the parties before advances are made.
3. While determining the loan amount to be sanctioned, sufficient margin should be kept against
securities taken so as to cover any decline in the value thereof and also to comply with RBI
directives.
4. Securities should be received and returned by responsible officer and should be kept in the joint
custody of at least two responsible officers.
5. Securities requiring registration should be registered in the name of the bank.
6. In the case of physical possession of goods as security, the goods should be test checked at the
time of receipts, In respect of hypothecated goods not in possession of the bank, surprise checks
should be made.
7. Personal inquiries should be made so as to determine market value of goods.
8. For any increase/decrease in the value of securities, drawing power should be adjusted, all the
accounts should be kept within both the drawing power and the sanctioned limit at all times.
9. All irregular accounts should be brought to the notice of the H.O. regularly.
10. The operation in each advance should be reviewed at least once every year.
11. There should exist a proper system for post disbursement supervision and follow-up.
12. Classification of advances should be made as per RBI Guidelines.
13. Ensure that the funds disbursed should be utilized only for the purpose for which advances has
been granted.
Q.2: The auditor can obtain sufficient appropriate audit evidence about advances by study
and evaluation of internal controls relating to advances. Explain in the context of Audit of
Banks. [RTP-Nov. 19]
ANSWER:
46
Collection of Evidences in respect of Advances:
Evidences in respect of advances may be collected by performing compliance and substantive
procedures.
Compliance Procedures:
a) Examine the following:
 Loan documentation;
 Validity of the recorded amounts;
 Existence, enforceability and valuation of the security;
b) Ensure compliance with the
 Terms of sanction
 End use of funds
 Loan Policy of Banks as well as RBI norms including appropriate classification and provisioning
 Review the operation of the accounts.
Substantive Procedures:
a) Verify that amounts included in balance sheet in respect of advances are outstanding at the date
of the balance sheet.
b) Verify that advances represent amount due to the bank.
c) Ensure that outstanding amount is appropriately supported by Loan documents.
d) Ensure that there are no unrecorded advances.
e) Verify the appropriateness of basis of valuation of advances.
f) Ensure that the recoverability of advances is recognised in their valuation.
g) Check that the advances are disclosed, classified and described in accordance with recognised
accounting policies and relevant statutory and regulatory requirements.
h) Ensure that appropriate provisions towards advances have been made as per the RBI norms.
Q.3: Mr. A approaches a bank of financial assistance for his upcoming project. The bank
branch manager, after verifying the proposal, is agreeable to financial Mr. A, but asks for
the security of be offered to the bank, Discuss the nature of securities required to be offered
to the bank. [May 18 (4 Marks)]
ANSWER:
Nature of Securities to be offered:
a) Primary security: Security offered by the borrower for bank finance or the one against which
credit has been extended by the bank.
b) Collateral security: It is an additional security and can be in any form i.e. tangible or intangible
asset, movable or immovable asset.
Security may be created by different modes like Mortgage, Pledge, Hypothecation, Lien, Assignment.
47
a) Mortgage: A Registered Mortgage can be affected by a ‘Mortgage Deed’ signed by the
mortgagor. Equitable mortgage, is affected by a mere delivery of title deeds or other documents
of title with intent to create security thereof.
b) Pledge: It involves physical delivery of goods by the borrower to the lending bank with the
intention of creating a charge thereon as security for the advance. Legal ownership of the goods
remains with the pledger while the lending banker gets certain defined interests in the goods.
c) Hypothecation: Hypothecation is the creation of an equitable charge which is created in favour
of the lending bank by execution of hypothecation agreement in respect of the movable securities
belonging to the borrower. Borrower holds the physical possession of the goods. Neither
ownership nor possessions are transferred to the bank. Borrower periodically submits statements
regarding quantity and value of hypothecated assets (like stocks, debtors, etc.) to the bank on the
basis of which the drawing power of the borrower is fixed.
d) Assignment: Assignment represents a transfer of an existing or future debt, right or property
belonging to a person in favour of another person. Only actionable claims such as book debts and
life insurance policies are accepted by banks as security by wary of assignment. An assignment
gives the assignee absolute right over the moneys/ debts assigned to him.
e) Set-off: Set-off is a statutory right of a creditor to adjust. Wholly or partly, the debt balance in
the debtor’s account against any credit balances lying in another account of the debtor.
f) Lien: Lien is creation of a legal charge with consent of the owner, which gives lender a legal right
to seize and dispose/liquidate the asset under lien.
Q.4: Newton Ltd. has made loans and advances on the basis of following securities to
various borrowers. As an’ auditor what type of documents can be verified to ensure that the
company holds a legally enforceable security?
(i) Shares and Debentures
(ii) Life Insurance Policy
(iii) Hypothecation of goods. [MTP May 20]
ANSWER:
Documents to be seen in case of Securities:
Type of Security Documents etc. to be seen

Shares and debentures The scrip and the endorsement thereon of the name of the
transferee, in the case of transfer.
Life Insurance Policy Assignment of policy in favour of the lender, duly registered with
the insurer
Hypothecation of goods Deed of hypothecation or other document creating the charge,
together with a statement of inventories held at the Balance Sheet
date
Q.5: Distinguish between Primary Security and Collateral Security with reference to audit of
Banks. Also give examples of most common types of securities accepted by the Banks.
48
[RTP Nov. 20]
ANSWER:
Primary Security and Collateral Security:
 Primary security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank. This security is the principal security for an advance.
 Collateral security is an additional security. Security can be in any form i.e. tangible or intangible
asset, movable or immovable asset.
 Examples of most common types of securities accepted by banks are the following:
 Personal Security of Guarantor
 Goods/Stocks/ Debtors/ Trade Receivables
 Gold Ornaments and Bullion
 Immovable Property
 Plantations (For Agricultural Advances)
 Third Party Guarantees
 Banker’s General Lien
 Life insurance Policies
 Stock Exchange Securities and Other Instruments
Q.6: In view of the significant uncertainty regarding ultimate collection of income arising in
respect of non-performing assets, the guidelines require that banks should not recognize
income on non-performing assets until it is actually realised. When a credit facility is
classified as non-performing for the first time, interest accrued and credited to the income
account in the corresponding previous year which has not been realized should be reversed
or provided for. This will apply to Government guaranteed accounts also. Analyse and
Explain. [RTP May 20]
ANSWER:
Reversal of Income:
 If any advance, including bills purchased and discounted, becomes NPA as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should be
reversed or provided for if the same is not realised. This will apply to Government guaranteed
accounts also.
 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.
 Further, in case of banks which have wrongly recognised income in the past should reverse the
interest if it was recognised as income during the current year or make a provision for an
equivalent amount if it was recognized as income in the previous year(s).
 Furthermore, the auditor should enquire if there are any large debits in the Interest Income
account that have not been explained. It should be enquired whether there are any
49
communications from borrowers pointing out differences in interest charge and whether
appropriate action has been taken in this regard.
50
AUDIT OF DIFFERENT TYPES OF ENTITIES

Q.1: Explain in detail the duties of Comptroller and Auditor General of India. [RTP-May 19]
ANSWER:
Duties of Comptroller and Auditor General:
1. Compilation and submission of Accounts: The C & AG should compile the accounts pertaining
to annual receipts and disbursements of the Union or State or union Territory, and submit these
to the President or Governor or Administrator.
2. Rendering Assistance in Accounts Maintenance: The C & AG should provide such
information to the Union or State or Union Territory, as they may require from time to time and
render such assistance for preparing annual F.S. as they reasonably ask for.
3. Auditing and Reporting: The C & AG should audit and report on:
 All the expenditure from Consolidated Fund of India/ State/ Union Territory having a
Legislative Assembly and to determine whether the monies disbursed were legally available
for and applicable to the purpose for which they are applied.
 All the transactions of Union or State pertaining to Contingency Funds and Public Accounts.
 All Trading, Manufacturing, Profit & Loss A/cs & Balance Sheets & other subsidiary accounts
kept in any department of a Union or State.
4. Audit of Receipts and Expenditure of substantially financed entities: Where anybody or
authority is substantially financed by grant or loans from the Consolidated Fund of India
/State/Union Territory, the CAG shall audit and report on all receipts and expenditure of that
body or authority.
5. Audit of Grants or Loans: Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India/State/Union Territory to any authority or body, Not being a foreign
State or international organisation, the CAG shall scrutinise the procedures by which the
sanctioning authority satisfies itself as to the fulfilment of the conditions subject to which such
grants or loans were given.
6. Audit of Receipts of Union or States: CAG shall audit all receipts which are payable into the
Consolidated Fund of India/ State/ Union Territory and satisfy himself that the rules and
procedures in that behalf are designed to secure and effective check on the assessment, collection
& proper allocation of revenue and are being duly observed.
7. Audit of Accounts of Stores and Stock: The CAG shall have authority to audit and report on
the accounts of stores and stock kept in any office or department of the Union/State.
8. Audit of Govt. Companies and Corporations: The duties and powers of the CAG in relation
to the audit of the accounts of government companies shall be performed and exercised by him
in accordance with the provisions of the Companies Act, 2013.
51
Q.2: Audit of government expenditure is one of the major components of government audit
conducted by the office of C&AG. The basic standard set for audit of expenditure are to
ensure that there is provision of funds authorised by competent authority fixing the limits
within which expenditure can be incurred. Explain those standards. [RTP Nov. 19]
ANSWER:
Basic Standards for audit of government expenditure:
Expenditure audit is conducted to observe the following standards:
i Expenditure incurred conforms to the relevant provisions of the statutory enactments and is also
in accordance with the financial rule and regulation. This is called audit against rules and orders.
ii There is proper sanction either special or general accorded by the competent authority for all
expenditure. This is known as audit or sanctions.
iii There are provisions or budget of funds out of which expenditure can be met. This is called audit
against provisions of fund.
iv The expenditure is incurred with due regard to broad and general principle of propriety. This is
called propriety audit.
That the programmes, schemes and projects where large expenditure has been incurred are being run
economically and yielding results. This is known as performance audit.
Q.3: What are the advantages of the audit of the accounts of partnership firm?
[MTP- April 19]
ANSWER:
Advantages of Audit of Partnership Firms:
The partnerships firms are governed by the Indian Partnership Act, 1932. This Act does not
contemplate audit of the partnership firm. However, it is in the interest of the partners that the
accounts of the firm are regularly audited by an independent auditor. The provision for the same may
be made in the partnership deed itself.
Advantages of Audit of Partnership Firms:
i Audited accounts help in settling accounts between the partners reliably.
ii Audited accounts provide a reliable evidence for computing the amount due to the retiring partner
or representative of deceased partner.
iii Acceptance of Audited accounts by the Government agencies for various purposes like Income tax
authorities for computing the assessable income.
iv Audited accounts are relied upon by banks for advancing loan.
v Audited account can be helpful in the negotiation for sale or admission of a new partner.
vi It is an effective safeguard against any undue advantage being taken by a working partner as
against the non-working partners.
Q.4: How will you vouch/verify the following investments income in the case of charitable
institution. [RTP Nov. 20]
52
ANSWER:
Investment Income in the case of Charitable Institution:
(i) Vouching the amounts received with the dividend and interest counterfoils.
(ii) Checking the calculations of interest received on securities bearing fixed.
(iii) Checking that the appropriate dividend has been received where any investment has been sold
ex-dividend or purchased cum-dividend.
(iv) Comparing the amounts of dividend received with schedule of investments making special
enquiries into any investments held for which no dividend has been received.
Q.5: Cine Screen Multiplex Ltd. is operating cinemas in different locations in Mumbai and
has appointed you as internal auditor. What are the areas that need to be verified in relation
to receipts from sale of Tickets? [MTP May 20]
ANSWER:
Verification points in receipts from sale of tickets:
(i) Verify that entrance to the cinema-hall during show is only through printed tickets;
(ii) Verify that they are serially numbered and bound into books;
(iii) Verify that the number of tickets issued for each show and class, are different though the numbers
of the same class for the show on the same day, week, run serially;
(iv) Verify that for advance booking a separate series of tickets is issued;
(v) Verify that the inventory of tickets is kept in the custody of a responsible official.
(vi) Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is
agreed with it.
(vii) Verify that a record is kept of the ‘free passes’ and that these are issued under proper authority.
(viii) Reconcile the amount of Entrainment Tax collected with the total number of tickets issued for
each class.
(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different
shows on a reference to Daily Statements which have been test checked as aforementioned with
record of tickets issued for the different shows held.
Q.6: As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report to
the members of the Multi-State co-operative society on the accounts examined by him and
on every balance-sheet and profit and loss account and on every other document required
to be part of or annexed to the balance-sheet or profit and loss account. Explain
[RTP May 20]
ANSWER:
Auditor’s Duties on Reporting of accounts and financial statements:
As per sub-section (3) & (4) of section 73 of Multi- state Co-operative Societies Act, 2002, the auditor
shall make a report to the members of the Multi-State co-operative society on the accounts examined
53
by him and on every balance-sheet and profit and loss account and on every other document required
to be part of or annexed to the balance-sheet or profit and loss account, which are laid before the
Multi-State cooperative society in general meeting during his tenure of office, and the report shall state
whether, in his opinion and to the best of his information and according to the explanation given to
him, the said account give the information required by this act in the manner so required, and give a
true and fair view:
(a) In the case of the balance-sheet, of the state of the Multi-State co-operative society’s affairs as at
the end of its financial year; and
(b) In the case of the profit and loss account, of the profit or loss for its financial year. The auditor’s
report shall also state:
(i) Whether he has obtained all the information and explanation which to the best of his
knowledge and belief were necessary for the purpose of his audit.
(ii) Whether, in his opinion, proper books of account have been kept by the Multi- State co-
operative society so far as appears from his examination of these books and proper returns
adequate for the purpose of his audit have been received from branches or offices of the
Multi-State co-operative society not visited by him.
(iii) Whether the report on the accounts of any branch office audited by a person other than
the Multi-State co-operative society’s auditor has been forwarded to him and how he has
dealt with the same in preparing the auditor’s report.
(iv) Whether the Multi-State co-operative society’s balance sheet and profit and loss account
dealt with by the report are in agreement with the books of account and return.
(v) Where any of the matters referred to in section 73(3) or 73(4) is answered in the negative
or with a qualification, the auditor’s report shall state the reason for the answer.
54
STANDARDS ON AUDITING

Q.1: The auditor evaluated, in respect of T Ltd., whether the financial statements are
prepared in accordance with the requirements of the applicable financial reporting
framework.
Auditor’s evaluation included consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s judgments.
Advise the qualitative aspects of the entity’s accounting practices.
[RTP-May 19, MTP-March 19]
ANSWER:
Qualitative Aspects of entity’s accounting practices:
SA 260 “Communication with those charged with Governance” requires the auditor to communicate
with the TCWG various matters, including therein is the auditor’s views about significant qualitative
aspects of the entity’s accounting practices, including accounting policies, accounting estimates and
F.S. disclosure. In this reference, SA 260 explains the following:
 When applicable, the auditor shall explain to TCWG why the auditor considers a significant
accounting practice, that is acceptable under the applicable FRF, not to be most appropriate to
the particular circumstances of the entity.
 FRF ordinarily allows the entity to make accounting estimates, and judgement about accounting
policies and financial statement disclosures, for example, in relation to the use of key assumptions
in the development of accounting estimates for which there is significant measurement uncertainty.
 In considering the qualitative aspects of the entity’s accounting practices, the auditor may become
aware of possible bias in management’s judgments.
 The auditor may conclude that lack of neutrality together with uncorrected misstatements causes
the financial statements to be materially misstated. Indicators of a lack of neutrality include the
following:
 The selective correction of misstatements brought to management’s attention during the audit
 Possible management bias in the making of accounting estimates.
Sa 540 addresses possible management bias in making accounting estimates, Indicators of possible
management bias do not constitute misstatements for purposes of drawing conclusions on the
reasonableness of individual accounting estimates. They may however, affect the auditor’s evaluation
of whether the financial statements as a whole are free from material misstatement.
Q.2: In considering the qualitative aspects of the entity’s accounting practices, the auditor
may become aware of possible bias in management’s judgments. The auditor may conclude
that lack of neutrality together with uncorrected misstatements causes the financial
statements to be materially misstated. Explain and analyse the indicators of lack of
neutrality with examples, wherever required. [RTP May 20]
55
ANSWER:
Qualitative Aspects of entity’s accounting practices:
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become
aware of possible bias in management’s judgments. The auditor may conclude that lack of neutrality
together with uncorrected misstatements causes the financial statements to be materially misstated.
Indicators of a lack neutrality include the following:
(i) The selective correction of misstatements brought to management’s attention during the audit.
Example
(a) Correcting misstatements with the effect of increasing reported earnings, but not correcting
misstatements that have the effect of decreasing reported earnings.
(b) The combination of several deficiencies affecting the same significant account or disclosure
(or the same internal control component) could amount to a significant deficiency (or
material weakness if required to be communicated in the jurisdiction). This evaluation
requires judgment and involvement of audit executives.
(ii) Possible management bias in the making of accounting estimates.
56

Audit Must Do List!! (Nov - 2021) - 211128 - 234249

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Audit Must Do List!! (Nov - 2021) - 211128 - 234249

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BY : VINIT MISHRA SIR

ALL INDIA RANK - 04 4

10 ALL INDIA RANK -10

1. NATURE, OBJECTIVE AND SCOPE OF AUDIT 1–5

2. AUDIT STRATEGY, AUDIT PLANNING & AUDIT PROGRAMME 6–9

3. AUDIT DOCUMENTATION AND AUDIT EVIDENCE 10 – 14

4. RISK ASSESSMENT AND INTERNAL CONTROL 15 – 18

5. FRAUD AND RESPONSIBILITIES OF THE AUDITOR 19 – 23

6. AUDIT IN AN AUTOMATED ENVIRONMENT 24 – 27

9. AUDIT OF ITEMS OF FINANCIAL STATEMENT 34 – 37

10. COMPANY AUDIT 38 – 41

11. AUDIT REPORTS 42 – 45

12. AUDIT OF BANKS 46 – 50

13. AUDIT OF DIFFERENT TYPES OF ENTITIES 51 – 54

14. STANDARDS ON AUDITING 55 – 56

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

Q.6: Explain clearly objective of the auditor regarding written representation.

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

Q.6: With respect to audit in an automated environment, explain the following:

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

Q.5: If analytical procedures performed in accordance with SA 520 identify fluctuations or

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

Type of Security Documents etc. to be seen

QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

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