CA FINLA NEW COURSE

ADVANCED AUDITING AND PROFESSIONAL ETHICS

FULL SYLLABUS TEST-1

Question No. 1 is Compulsory

Attempt any Four Questions out of remaining Five Questions

Total Marks 100

Case Study-1

MINSAN Ltd., an unlisted company in South India, is engaged in the business of spice oil
extraction. Total paid up capital of the company is Rs 9 crore. Details of annual turnover and
profit of the company for the last 3 years are given below:

Year ended Turnover (Rs in crore) Profit (loss) before tax (Rs in crore)
31-03-2019 527.21 (Audited) 50.16
31-03-2020 301.37 (Audited) 01.25
31-03-2021 104.13 (Provisional) (10.25)

The company is using conventional method for extraction of oil from spices. This requires more
human intervention and hence, cost of production is high as compared to innovation method
used by other new companies. Though the company had significant growth in the past years, it
has not done well over the last two financial years due to competition.

A new competitor viz, Natural Extracts Ltd, had come in the market during the year 2019 and by
the end of March, 2020, they captured around 75% of market share by offering the product at a
reduced price. They use new machinery which allows whole range of automated extraction
method, thus, minimizing manual steps and reducing cost of labour.

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In order to reduce cost of production and thereby re-capture the market, the management of
MINSAN Ltd. has planned to erect a new plant with an automatic machine. The estimated cost
of plant & machinery is Rs 90 lakhs. The company approached SA Bank Ltd for a term loan of Rs
80 lakhs which would be repaid in 5 years. On 28-12-2020, the bank had sanctioned the loan;
and disbursed Rs 40 lakhs till 31st March 2021.

MINSAN Ltd has appointed M/s Check & Check, Chartered Accountants, as auditors of the
company at its AGM held on 18-09-2020 for a period of 5 years. As agreed, the audit team
commenced their audit work for the year 2020-2021 in February 2021 and completed the work
by the end of April 2021. The audit team submitted following findings to the engagement
partner:

 PX Ltd. one of the material suppliers filed a case against the company on 12-09-2020 for a
compensation of Rs 3 crore.
 Company has made an estimate for allowance of debtors @ 5%
 70% of the value of inventory was only covered in physical verification during the year
2020-21
 Company got a show cause notice from state pollution control board for the
contravention of the provisions of Hazardous and waste management rule.
 Three incidences of fraud noticed (Total Rs 1.02 crore) – fraud committed by the purchase
manager Rs 85 lakhs, by accounts manager Rs 15 lakhs and by a cashier Rs 2 lakhs.

As an auditor of MINSAN Ltd. for the year 2020-21, answer the following questions based on
the facts given in the above paragraph:

1. Though the company had significant growth in the past years, it has not done well over the
last two financial years. As per SA 570, there are certain events or conditions that individually
or collectively may cast significant doubt about the going concern assumptions. In order to
assess whether MINSAN Ltd. is a going concern or not, which of the following audit
procedures should NOT be performed?

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 a) Analysis and discuss with the management of the company to find out whether
installation of new plant and machinery would enable the company to reduce cost of
production.
b) Inquire the company’s legal counsel regarding existence of legal litigation and claim
against the company, reasonableness of management assessments of their outcome
and estimate of their financial implication.
c) Evaluating management’s future plan and strategy to increase market share of product.
d) Analysis and discuss the company’s cash flow and profit of the previous years with the
projected accounts.

2. Company has made an estimate for allowance of debtors @ 5%. Some financial statement
items cannot be measured precisely but can only be estimated. The nature and reliability of
information available to management to support the making of an accounting estimate varies
widely, which thereby affects the degree of estimating uncertainty associated with
accounting estimates. Please advise which among the following may have higher estimate
uncertainty and higher risk as per SA 540?

a) Judgments about the outcome of pending litigation with PX Ltd. against the company.
b) Estimates made for inventory obsolescence that are frequently made and updated.
c) A model used to measure the accounting estimates is well known and the assumptions
to the model are observable in market place.
d) Accounting estimate made for allowance for doubtful debts where the result of the
auditors review of similar accounting estimates made in the prior period financial
statements do not indicate any substantial difference between the original accounting
estimate and the actual outcome.

3. The company in the notes accompanying its financial statements disclosed the existence of
suit filed against the company with full details. Based on the audit evidence obtained, it is

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necessary to draw user’s attention to the matter presented in the financial statement by way
of clear additional communication as there is an uncertainty relating to the future outcome of
the litigation. In this situation, which of the following reporting option would be correct if
auditor is satisfied with the conclusions reached by the management and this matter is
fundamental to the reader of financial statements?

a) Include an Emphasis of matter paragraph in Auditors report having a clear reference to

the matter being emphasized and issue a qualified opinion.
b) Include in the Basis for Adverse opinion paragraph and issue an adverse opinion having
a clear reference to the matter referred in the notes on accounts.
c) Include in the Basis for Disclaimer of opinion paragraph having a clear reference to the
matter and issue a disclaimer opinion.
d) Include an Emphasis of matter paragraph in Auditor report having a clear reference to
the matter being emphasized and to where relevant disclosures that fully describe the
matter can be found in the financial statement.

4. Company got a show cause notice state pollution control Board. As per SA 250, the auditor
shall perform the audit procedures to help identify instances of non-compliance with other
laws and regulations that may have a material effect on the financial statements. As the audit
team of the company became aware of information concerning an instance of non-
compliance with law, what would NOT be the audit procedure to be performed?

a) Understand the nature of the act and circumstances in which it has occurred and obtain
further information to evaluate the possible effect on the financial statement.
b) Discuss the matter with management and if they do not provide sufficient information;
and if the effect of non-compliance seems to be material, legal advice may be obtained.
c) Monitoring legal requirement and compliance with code of conduct and ensuring that
operating procedures are designed to assist in the prevention of non-compliance with
law and regulation and report accordingly.

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 d) Evaluate the implication of non-compliance in relation to other aspects of audit
including risk assessment and reliability of written representation and take appropriate
action.

5. The company had availed some amount of loan for new plant and machinery during the
year under audit. Out of the total loan sanctioned an amount of Rs 25 lakhs was earmarked
for the purchase of the machinery-oil extractor; but the company has acquired an improved
model of machinery, viz, Oil extractor with Dryer in its stead. State which of the reporting
option would be correct.

a) State the fact in CARO report that out of team loan taken for machinery-Oil Extractor, Rs
25 lakhs was not utilized for acquiring the machinery for which it was sanctioned.
b) Ask the management to change terms and condition of team loan as the company has
acquired a different machinery. Report under CARO, if the management does not agree
with the demand.
c) State the fact in CARO report that the term loan taken has been applied for the purpose
for which it was sanctioned.
d) State the fact in CARO report that the term loan taken has not been applied for the
purpose for which it was sanctioned. Also qualify the report as there are misstatements
that are material but not pervasive.

(5 x 1 = 5 marks)

Case Study-2

M/s Suresh & Co., a Partnership firm, has been appointed for the 7 th consecutive year, as the
statutory auditor of Alkis Ltd., an unlisted public company, for financial year 2020-21.

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Mr. Suresh is the engagement partner for the audit assignment of Alkis Ltd. The engagement
team, before starting the assignment, was made to read the policies and procedures designed
to achieve desired quality control, with respect to the type of assignment being under taken.

Mr. Suresh, referred the engagement letter, signed with the management initially and was
considering whether there was a requirement to send a new engagement letter, in light of
following circumstances in the company during F.Y. 2020-21:

Two senior whole time directors of the company have retired out of total five directors.

40% stake in the company was held by promoters, which was reduced to 5%, by selling shares
to general public.

One more factory unit was set up in Gorakhpur, this year.

Management has requested to cover 90% of the transactions with respect to each revenue line
item, this time, instead of 80% of the transactions, as was set out in the audit plan, considering
the materiality and other factors.

The following data is presented from the audited financial statements of Alkis Ltd., for the
financial year 2019-2020:

(i) Paid up share capital – Rs 8 crore;

(ii) Turnover – Rs 55 crore;

(iii) Outstanding Borrowings – Rs 14 crore;

(iv) Outstanding Public Deposits – Rs 28 crore

Mr. Suresh while preparing a report under section 143 of the Companies Act, 2013, made a
statement with respect to the remuneration paid by the Alkis Ltd. to one of its directors, Mr.
Mahesh, was in excess of the Limit laid down under section 197 and also gave such other
details as prescribed.

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Mr. Suresh, for additional reporting purpose, while auditing with respect to compliance with
CARO, observed the following, relevant to Para 3(vii) of CARO:

Statutory Dues Undisputed Amount Date Payable Date Paid

(Rs in lakh)
Income Tax Demand 2 25th September 2020 28th March 2021
for A.Y. 2018-19
GST 1.5 3rd October 2020 4th April 2021
Customs Duty 0.80 20th September 2020 10th April 2021
Provident Fund 0.45 12th October 2020 Not paid till date

Also, a representation was made to GST Department for waiving a penalty of Rs 1 lakh for late
payment of GST demand.

The board of Alkis Ltd. declared interim dividend of Rs 20 lakh on 20th May 2021, to its 180
shareholders, out of surplus in the profit and loss account and such dividend amount was
deposited in a separate bank with a branch of SBI.

Dividend amounting to Rs 1 lakh was not claimed by a shareholder, Mr. Rohit, till 19th June
2021, and so the said amount of Rs 1 lakh was transferred to Unpaid Dividend Account on 31st
July 2021.

On the basis of the abovementioned facts, you are required to answer the following MCQs:

1. Which of the following option is correct with respect to Alkis Ltd.?

a) Alkis Ltd. needs to form an audit committee. Further, provisions relating to internal audit
as well as rotation of auditors are applicable to Alkis Ltd.
b) Alkis Ltd. not to form an Audit Committee. Further, provision relating to internal audit is
not applicable to Alkis Ltd. However, the provisions with respect to rotation of auditors
are applicable to it.

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 c) Alkis Ltd. need not to form an Audit Committee. Further, provisions relating to rotation of
auditors is not applicable to Alkis Ltd. However, the provisions with respect to internal
audit are applicable to it.
d) Alkis Ltd. need to form an Audit Committee. Provisions relating to internal audit is
applicable to Alkis Ltd. However, the provision with respect to rotation of auditors are not
applicable to it.

2. Under which section of the auditor’s report, Mr. Suresh needs to report with respect to the
excess remuneration being paid to Mr. Mahesh?

a) Other Matters Paragraph.

b) Report on Other Legal and Regulatory Requirements.
c) Basis for Qualified Opinion.
d) Auditor’s Responsibilities for the Audit of the Financial Statements.

3. What total amount of statutory dues needs to be reported by Mr. Suresh as per Para 3 of
CARO?

a) Rs 2.75 lakh
b) Rs 0.80 lakh
c) Rs 2.80 lakh
d) Rs 2.30 lakh

4. How much amount of interest Alkis Ltd. would be liable to pay with respect to unpaid
dividend amount?

a) Rs 5.75
b) Rs 1,216.

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 c) Rs 1,726.
d) Rs 1.151.

5. By what date, the amount of interim dividend should have been deposited in the
scheduled bank after being declared and also by what date, the unpaid or unclaimed dividend
amount should have been transferred to unpaid Dividend Account?

a) 25th May 2021 and 24th June 2021, respectively

b) 25th May 2021 and 26th June 2021, respectively
c) 30th May 2021 and 19th July 2021, respectively
d) 27th May 2021 and 26th June 2021, respectively

(5 x 1 = 5 marks)

MCQs

1. You are the Auditor of Power Supply Corporation Limited, a Government Company for the
year ended on 31st March 2018. The turnover of the company for the period was Rs 12,000
crores from sale of power. During your audit, you found that the company has purchased
Spares for Transmitters for Rs 850 crores from abroad through a Corporation by name
procurement and Supply India Limited which is also owned and controlled by Government of
India. The financial Statements of the power Supply Corporation Limited, prepared in
compliance with Ind AS for the year ended on 31.03.2018 did not contain any additional
disclosure regarding the procurement of spares as referred to above. To your query as to
whether any disclosure regarding Related party Transaction would be required, the
Management of the Corporation replied that no such disclosure would be necessary for
transactions between state controlled enterprises.

a) Contention of the management is correct as no disclosure required in case of

transactions between state controlled enterprises.

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 b) Contention of the management is not correct and Auditor shall modify his report as
necessary disclosure as required by Ind AS 24 not provided in the financial statements.
c) Contention of the management is not correct and Auditor shall modify his report as
necessary disclosure as required by AS 18 not provided in the financial statements.
d) Contention of the management is not correct and Auditor shall modify his report as
necessary disclosures as required by Schedule III not provided in the financial
statements.

2. Business of ABC Ltd. an Indian company engaged in consultancy services has been growing
significantly and company becomes subject to various laws and regulations. Because of
increased compliances, management is facing difficulties to keep in pace with the changing
regulatory requirements. The statutory auditors of the company, Ram & Co., have considered
compliance with laws and regulations as a significant risk for the purpose of their audit.

Ram & Co. had a audit planning meeting with the management and management has
understood that it will be their responsibility including TCWG to ensure that the company’s
operations are fully compliant with the provisions of various laws and regulations. This may
also have an impact on the reported amounts and disclosures in the financial statements of
the company.

Management is planning to ensure full compliance and may implement policies and
procedures, wherever required to assist in the prevention and detection of non-compliance
with laws and regulations. Advise which one of the following will not be a policy/procedure
to be implemented to assist in the prevention and detection of non-compliance with laws and
regulations in accordance with SA 250?

a) Monitoring legal requirements and ensuring that operating procedures are designed to
meet these requirements.
b) Maintaining a register of significant transactions of the company with comparison to
particular industry and a record of complaints.

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 c) Developing, publicizing and following a code of conduct.
d) None of the above.

3. In course of audit of Good Samaritan Bank as at 31st March 2019 you observed the
following: In a particular account there was no recovery in the past 18 months. The bank has
not applied the NPA norms as well as income recognition norms to this particular account.
When queried the bank management replied that this account was guaranteed by the Central
Government and hence these norms were not applicable. The bank has not invoked the
guarantee.

a) Bank is correct to the extent of not applying the NPA norms for provisioning purpose.
But this exemption is not available in respect of income recognition norms.
b) Bank is not correct to the extent of not applying the NPA norms for provisioning
purpose. But this exemption is available in respect of income recognition norms.
c) Bank is correct in not applying the NPA norms and income recognition norms.
d) Bank is not correct in not applying the NPA norms and income recognition norms.

4. ALTO Ltd. is a unlisted company in the business of the real estate, recognizes revenue on
the basis of percentage completion as per AS 7. The company has various residential and
commercial projects at different locations for which separate profitability statements are
prepared by the management profitability statements are based on estimated costs of the
projects. While reviewing the profitability statements, statutory auditors observed that the
profitability of the projects have been fluctuating significantly year on year and the prime
reason for that is the change in the estimated costs.

As per the auditors, frequent changes are made by the management in the estimated costs to
increase the percentage completion and through which revenue and profits are manipulated.
The auditor are not satisfied with the profitability statements of two major projects which
account for 50% of the total turnover of the company. Management tried to explain the

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auditors saying that the changes would happen because of the dynamics of the industry
which have been changing significantly and are unfavorable to the industry as a whole. All of
this is leading to changes in the estimated costs. How should the auditors deal with this
matter?

a) Management’s view seems reasonable. Auditor should drop this matter as estimated
costs are only estimates which are subject to changes.
b) View of the auditor seems reasonable and if the management does not agree, auditors
should issue disclaimer of opinion.
c) The auditors should consider the impact of the adjustment on the financial statements
and if the impact is pervasive, the auditor should issue adverse opinion.
d) The auditors should consider the impact of the adjustment on the financial statements
and may ask the management for written representation in this regard and basis that
issue a clean report.

5. Concession Ltd. is engaged in the business of manufacturing of treads. The company

recorded the turnover of Rs 1.13 crore during the financial year 2020-21 before adjusting the
following:

Discount allowed in the sales invoice Rs 8,20,000

Cash discount (other than allowed in cash memo/sales invoice) Rs 9,20,000
Trade discount Rs 2,90,000
Commission on sales Rs 6,00,000
Sales return (F.Y. 2019-20) Rs 1,60,000
Sale of Investment Rs 6,60,000

Effective turnover to be considered for the prescribed limit of tax audit will be:

a) Rs 1,00,30,000

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 b) Rs 91,30,000
c) Rs 97,70,000
d) Rs 1,01,90,000

6. MN and Associates is a firm of Chartered Accountants. The firm has 8 partners. The firm
has a good portfolio of clients for statutory audits but the same clients had some other firms
as their tax auditors. In the current year (FY 2018-19), many existing clients for whom MN and
Associates happens to be the statutory auditor have requested the firm to carry out their tax
audits as well. The firm is expecting the number of tax audits to increase significantly this
year. One of the partners of the firm has also raised a point that every partner can sign only
specified number of audit assignments. However, other partners are of the strong view that
any partner of the firm can sign the tax audit reports. Choose the correct answer.

a) All the partners of the firm can collectively sign 360 tax audit reports.
b) All the partners of the firm can collectively sign 480 tax audit reports.
c) All the partners of the firm can collectively sign 360 tax audit report. However, one
partner can individually sign maximum 60 tax audit reports.
d) All the partners of the firm can collectively sign 480 tax audit reports. However, one
partner can individually sign maximum 60 tax audit reports.

7. Para 3 (i) (b) of CARO, 2020 requires auditor to report “Whether the property, plant and
equipment have been physically verified by the management at reasonable intervals”. What
constitutes “reasonable intervals” depends upon the circumstances of each case. The
management may decide about the periodicity of physical verification of fixed assets
considering the relevant factors. While an annual verification may be reasonable, it may be
impracticable to carry out the same in some cases. In such cases:

a) The verification programme should be such that more than 50% of the assets are
verified every year.

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 b) The verification programme should be such that more than 50% of the assets are
verified at least once in every three years.
c) The verification programme should be such that all assets are verified every year.
d) The verified programme should be such that all assets are verified at least once in every
three years.

8. The financial statements of ABC Ltd., an Indian company, are prepared for inclusion in the
consolidated financial statements of its non-Indian parent. These financial statements are
prepared sin conformity with the accounting principles generally accepted in the parent’s
country and are for use only in that country. How may ABC Ltd, auditor report on these
financial statements?

I. An Indian –style report (unmodified).

II. An Indian- style report modified to report on the accounting principles of the parent’s
country.

III. The report form of the parent’s country.

Select the appropriate one:

I II III
a) Yes No No
b) No Yes No
c) No Yes Yes
d) Yes No Yes

9. As per NBFC Auditor’s report (Reserve Bank) Directions, 2016, in addition to the Report
made by the auditor u/s 143 of the companies Act, 2013, the auditor shall also make a

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separate report to the Board of Directors of the company. In such report, auditor shall include
a statement “Whether the company has furnished to the Bank the annual statement of
capital funds, risk assets/exposures and risk asset ratio within the stipulated period”. This
statement is to be included in case of:

a) All NBFC
b) NBFC accepting public deposits only
c) Systemically Important Non-deposit taking NBFCs
d) NBFC other than Systemically Important Non-deposit taking NBFCs

10. Shareholders of Akash Ltd. not satisfied with the performance of the company inferred
that some activities conducted by the company are against the interest of the members of
the company. Group of shareholders of the company filed an application to the Central
Government to appoint an inspector to carry out investigation to look into the matter.

a) Application will not be accepted as investigation can be ordered by Central Government

on intimation of an ordinary resolution passed by the company that the affairs of the
company ought to be investigated.
b) Central Government is mandatorily required to issue the order of investigation.
c) Central Government may in public interest can order the investigation.
d) Central Government is not empowered to pass order of investigation in case of non-
government companies.

(10 x 2 = 20 marks)

Q-1

(a) Jinchandra & Co., Chartered Accountants, have been appointed Statutory Auditors of
Gurudeva Ltd. for the F.Y. 2020-21. The audit team has completed the audit and is in the

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process of preparing audit report Management of the company has also prepared draft annual
report.

Audit in-charge was going through the draft annual report and observed that the company has
included an item in its Annual Report indicating downward trend in market prices of key
commodities/raw material as compared to previous year. However, the actual profit margin of
the company as reported in financial statements has gone in the reverse direction. Audit
Manager discussed this issue with partner of the firm who in reply said that auditors are not
covered with such disclosures made by the management in its annual report, it being the
responsibility of the management.

Do you think that the partner is correct in his approach on this issue?

Discuss with reference to relevant Standard on Auditing the Auditor's duties with regard to
reporting.

(5 marks)

(b) MB & Associates is a partnership firm of Chartered Accountants which was established
seven years back. The firm is getting new clients and has also, been offered new
engagement services with existing clients. The firm is concerned about obtaining such
information as it considers necessary in the circumstances before accepting an
engagement with a new client and acceptance of a new engagement with an existing client.
The firm is looking to work with only select clients to adhere to the Quality Control
Standards. Guide MB & Associates about the matters to be considered with regard to the
integrity of a client, as per the requirements of SQC 1.

(5 marks)

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(c) M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing
cash credit limit from U Bank of Rs 25 crores. The limit availed remained less than Rs 5.00
crores during all the days of F.Y. 2021-22. The company has not done any credit in cash credit
account during the year as it is operating current account in newly opened another bank branch
adjoining to company premises. The company is having sufficient security of stocks and debtors
and DP of Rs 25.00 crores remains all over the year. The company is availing term loans from
other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U
Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as
Non-Performing Accounts. Now company seeks your opinion.

(4 marks)

Q-2

(a) RAJUL & Co." is an Audit Firm having partners "Mr. R", "Mr. A", "Mr. J", “Mr. U" and “Mr. L",
Chartered Accountants. "Mr. R", "Mr. A", "Mr. J", "Mr. U" and "Mr. L" are holding appointment
as an Auditor in 4, 5, 6, 10 and 15 Companies respectively.

(i) Provide the maximum number of Audits remaining in the name of "RAJUL & Co."
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e.
"Mr. R", "Mr. A", "Mr. J", "Mr. U" and "Mr. L".
(iii) Can RAJUL & Co. accept the appointment as an auditor in 80 private companies having
paid-up share capital less than Rs 100 crores which has not committed default in filing its
financial statements u/s 137 or annual return u/s 92 of the Companies Act with the
Registrar, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are
having paid-up share capital of Rs 115 crores each?

(5 marks)

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(b) XY Ltd. is a manufacturing company, provided following details of wastages of raw materials
in percentage, for various months. You have been asked to enquire into causes of abnormal
wastage of raw materials. Draw out an audit plan. Wastage percentage are:

July 2021 - 1.5% Aug 2021 - 1.7%

Sep 2021 - 1.4% Oct 2021 - 4.1%

(5 marks)

(c) Mr. Z, a newly qualified chartered accountant started his practice in February 2021 by
setting up an office in the hill station Kodaikanal. Initially, since he was getting very less
assignments, he decided to set up a temporary office in the nearby city Marudai, situated at
about 100 kms from the main office. As planned, he took an office space on rent for the months
of Dec. Jan. and Feb. During these months, his regular office was not closed and Mr. Z was in-
charge for both the offices. Mrs. A, another newly qualified chartered accountant who is also in
practice in Marudai came to know about the new office of Mr. Z. Thinking that he could be a
potential competitor, she informed the institute stating that Mr. Z had violated the provisions
of the Chartered Accountant Act. As a member of the Board of Discipline of ICAI, you are
requested to analyse this complaint.

(4 marks)

Q-3

(a) Whilst the Audit team has identified various matters, they need your advice to include the
same in your audit report in view of CARO, 2020:

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a) The long-term borrowings from the parent has no agreed terms and neither the interest nor
the principal has been repaid so far.
b) The Company is in the process of selling its office along with the freehold land available at
Chandigarh and is actively on the lookout for potential buyers. Whilst the same was
purchased at Rs 25 Lakhs in 2008, the current market value is Rs 250 Lakhs,

This property is pending to be registered in the name of the Company, due to certain
procedural issues associated with the Registration though the Company is having a valid
possession and has paid its purchase cost in full. The Company has disclosed this amount
under Fixed Assets though no disclosure of non-registration is made in the notes forming
part of the accounts.

c) An amount of Rs 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership
firm, which is a 'related party' in accordance with the provisions of the Companies Act, 2013
for the marketing services rendered by them. Based on an independent assessment, the
consideration paid is higher than the arm's length pricing by Rs 0.25 Lakhs per month.
Whilst the transaction was accounted in the financial statements based on the amounts'
paid, no separate disclosure has been made in the notes forming part of the accounts
highlighting the same as a 'related party' transaction.
d) The Internal Auditor of the Company has identified a fraud in the recruitment of employees
by the HR department wherein certain sums were alleged to have been taken as kickback
from the employees for taking them on board with the Company. After due investigation,
the concerned HR Manager was sacked. The amount of such kickbacks is expected to be in
the range of Rs 12 Lakhs.

(6 marks)

(b) On receipt of statutory audit report on 30-03-2021 of M/s Sunlight Ltd., a government
company, C&AG on 25-05-2021 appointed M/s Veeru & Associates to conduct supplementary
audit u/s 143(6)(a) of the Companies Act, 2013. They submitted their report to C&AG as per

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their scope of work. The Company held its AGM on 01-09-2021 but directors did not think it
necessary to discuss supplementary auditor's report and comment of the C&AG. Is the
approach of the directors of Sunlight Ltd. correct? Guide the company with the provisions
related to supplementary audit.

(4 marks)

(c) BSF Limited is engaged in the business of trading leather goods. You are the internal auditor
of the company for the year 2021-22. In order to review internal controls of the Sales
Department of the company, you visited the Department and noticed the work division as
follows:

1) An officer was handling the sales ledger and cash receipts.

2) Another official was handling dispatch of goods and issuance of Delivery challans.
3) One more officer was there to handle customer/debtor accounts and issue of receipts.

As an internal auditor, you are required to briefly discuss the general condition pertaining to
the internal check system prevalent in internal control system. Do you think that there was
proper division of work in BSF Limited? If not, why?

(4 marks)

Q-4

(a) CA Raghu is practicing in the field of Income- - tax over a period of 12 years. He has gained
experience in this domain over others.

Sam, a student of Chartered Accountancy Course is very much impressed with the knowledge
of CA Raghu. He approached CA Raghu to take guidance on some topics of Income-tax related

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to his course. CA Raghu, on request decided to spare time and started providing private
tutorship to Sam and some of his friends along with. However, he forgot to take specific
permission from the ICAI, for such private tutorship,

Is CA Raghu, professionally liable for misconduct?

(4 marks)

(b) CA. Vimal is the auditor of Excellent Ltd., a parent company which presents Consolidated
Financial Statements. The management of Excellent Ltd. has provided the list of the
components included in the Consolidated Financial Statements. As an auditor of Consolidated
Financial Statements, CA Vimal has to verify that all the components have been included in the
Consolidated Financial Statements and review the information provided by the management in
identifying the components. State the procedures to be followed by CA. Vimal in respect of
completeness of this information.

(5 marks)

(c) You are doing Tax Audit of Private Limited Company for the financial year ending 31st
March, 2022 During audit, you notice that the company is not regular in deposit of VAT/GST
and there remains pendency every year. The details of VAT/GST payable are:

(i) GST payable as on 31/03/2021 of FY 2020-21 was Rs 200 Lakh and out of which Rs 100
Lakh war paid on 15/09/2021 and Rs 50 Lakh on 30/03/2022 and balance of Rs 50 Lakh is
outstanding.
(ii) GST payable of current financial year 2021-22 was Rs 100 lakh and out of this, Rs 40 Lakh
was paid on 25/05/2021 and balance of Rs 60 Lakh remained unpaid till the due date of
return.

The date of Tax Audit report and due date of return was 30th September.

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Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit Report
under Section 43B(a)?

(5 marks)

Q-5

(a) CA. M has been appointed as an auditor of Life Secure Insurance Ltd. He observed that few
insurance policies have been sold by the company in the last month of the financial year ending
31st March, 2021. While recognizing income in the income statement of the company, it is the
responsibility of CA. M to make an assessment of the reasonability of the risk pattern managed
by the management. Also, it is to be ensured by him that Life Secure Insurance Ltd. should not
issue policies, if the risk is not established before the closure of the F.Y. 2020-21.

Indicate the circumstances when the company should not issue the policy documents.

(5 marks)

(b) In assessment procedure of M/s Cloud Ltd., Income Tax Officer observed some irregularities.
Therefore, he started investigation of Books of Account audited and signed by Mr. Old, a
practicing Chartered Accountant. While going through books he found that M/s Cloud Ltd. used
to maintain two sets of Books of Account, one is the official set and other is covering all the
transactions, Income Tax Department filed a complaint with the Institute of Chartered
Accountants of India saying Mr. Old had negligently performed his duties. Comment.

(5 marks)

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(c) The auditors are required to understand, evaluate and validate the entity level controls as a
part of audit engagement, the result of which has an impact on the nature, timing and extent of
other procedures. In evaluating the effect of such control, existence, effectiveness and
assessment of whistle-blower policy in the company is very important. Specify the procedure
you would perform for an understanding and evaluation of such whistle-blower policy.

(4 marks)

Q-6

(a) Somi-Kraft Paper Ltd. is a Public Limited company. There is a proper system of Operational
Audit in the company. You as an advisor to the company have suggested desirability of
Management Audit. Management is of the strong opinion that there is no difference between
management audit and Operational Audit. Elaborate.

(5 marks)

(b) Abhimanyu Finance Ltd. is a Non Banking Finance Company and was in the business of
accepting public deposits and giving loans. The company was having net owned funds of Rs
1,50,00,000/-(one crore fifty lakhs) and was not having registration certificate from RBI and
applied for it on 30th March 2022. The company appointed Mr. Kabra as its statutory auditors
for the year 2021-22. Advise the auditor with reference to auditor procedures to be taken and
reporting requirements on the same in view of CARO 2020?

(5 marks)

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(c) D Ltd., a company incorporated in India has six members in its Audit Committee. Due to
recessionary conditions in India the revenue of the company is going down and there is
showdown in other activities of the company. Therefore, it is expected that there would not be
significant work for members of the Audit Committee.

Considering the overall recession in the company and the economy, the members of the
Committee decided unanimously to meet only once at the year end. They reviewed monthly
information system of the company and found no errors.

As an auditor of D Limited would you consider the decision taken by the Audit Committee to
hold the meeting once in a year, is complying with Listing Obligation and Disclosure
Requirements (LODR)? Also state the quorum requirements for such meetings.

OR

(c) Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto:
D, a Chartered Accountant examined and reported on the prospective financial statements for
one of his clients to obtain a cash credit facility of Rs.75 lakhs from a Private Bank. The bank has
sanctioned the cash credit facility for Rs. 60 lakhs to his client. Consequent to the sanction of
loan by Bank, he charged a fees of Rs. 60,000 based on 1% of the credit facility sanctioned.

(4 marks)

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