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Question Paper

AUDITING & ETHICS Duration: 180

Details: Full Test 1 Marks: 100

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets in
arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge your
performance.

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Notes: 1. Question Paper comprises two part, Part I and Part II

2. Part I is having multiple choice Questions which is compulsory

3. Part II Comprise descriptive Questions and in which Question No. 1 is Compulsory and
answer any 4 out of remaining 5 questions

4. Answer new Question on new page

Case Study I: Auditing ABC Bank's Financial Statements

ABC Bank, a mid-sized commercial bank with a network of branches across India, has engaged
your auditing firm to conduct an audit of its financial statements for the year 2023. Your team
has been assigned to lead this engagement.

ABC Bank has recently implemented a new core banking system, which has led to some initial
challenges in data migration and system integration. The bank has also expanded its loan
portfolio significantly in the past year, particularly in the commercial real estate sector. There
have been recent media reports about fraudulent activity involving loan approvals at a few
other banks. The Reserve Bank of India (RBI) has issued new guidelines on non-performing asset
(NPA) recognition and provisioning, which are applicable to ABC Bank.

Task:

 Review the bank's internal control systems, focusing on areas related to:
 Loan origination and approval processes
 IT systems and data security
 Accounting for non-performing assets

Perform substantive testing of key financial statement accounts, including:

 Loans and advances

 Deposits

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 Investments
 Provisions for NPAs

REMUNERATION OF AUDITOR

(a) The remuneration of auditor of a banking company is to be fixed in accordance with the
provisions of Section 142 of the Companies Act, 2013 (i.e., by the company in general meeting
or in such manner as the company in general meeting may determine).

(b) The remuneration of auditors of nationalised banks and State Bank of India is to be fixed by
the Reserve Bank of India in consultation with the Central Government.

Format of Report

The auditors, central as well as branch, should also ensure that the audit report issued by them
complies with the requirements of Standards on Auditing discussed in Chapter 8 on Audit
Report. The auditor should ensure that not only information relating to number of unaudited
branches is given but quantification of advances, deposits, interest income and interest
expense for such unaudited branches has also been disclosed in the audit report. Such
disclosure in the audit report is not only in accordance with the best international trends but
also provides useful information to users of financial statements.

Long Form Audit Report

Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks (as well
as their branches), require the auditors to also furnish a long form audit report (LFAR). The
matters which the banks require their auditors to deal with in the long form audit report have
been specified by the Reserve Bank of India. The Statutory Central Auditors are required to
submit the LFAR to the banks every year.

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MCQs:

1. How is the remuneration of auditors determined in banking companies under the relevant
provisions?

(a) The government issues a fixed remuneration for all auditors in banking companies.

(b) By the company in a general meeting or in a manner determined by the company in a

general meeting under Section 142 of the Companies Act, 2013.

(c) The auditors fix their own remuneration based on industry standards.

(d) None of above

2. Which of the following is NOT a requirement of the auditor's report for a nationalized bank?

(a) Opinion on whether the financial statements present a true and fair view

(b) Confirmation that transactions have been made within the bank's powers

(c) Statement on the adequacy of internal controls

(d) Disclosure of any unaudited branches

3. Which of the following is a key difference between the Companies Act, 2013 and the Banking
Regulation Act, 1949 regarding auditor reporting?

(a) The Companies Act requires a Long Form Audit Report (LFAR), while the Banking Regulation
Act does not.

(b) The Banking Regulation Act requires reporting on matters covered by Section 143 of the
Companies Act, while the Companies Act itself does not.

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(c) The Companies Act requires reporting on the Companies (Auditor's Report) Order, 2020,
while the Banking Regulation Act exempts banks from this requirement.

(d) There are no significant differences in auditor reporting requirements between the two acts.

4. Which of the following is a key consideration when auditing a bank's loan portfolio?

(a) The adequacy of credit risk assessment procedures

(b) The accuracy of loan loss provisioning

(c) Compliance with RBI guidelines on NPA recognition

(d) All of the above

5. What is the deadline for submitting the Long Form Audit Report to banks by Statutory
Central Auditors?

(a) 30th September every year

(b) 30th June every year

(c) 31st March every year

(d) 15th January every year

(2×5= 10 Marks)

Case Study II

XYZ Associates, Chartered Accountants, is a well-respected firm in its field of expertise. The firm
is led by CA X and CA Y. The partners actively contribute to assignments, and the staff supports
them in legal research and compliance activities.

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The firm has recently been appointed as auditors of Mountain View Ltd. Before commencing
the audit, the auditors thoroughly reviewed the audit engagement, outlining the responsibilities
of both the auditor and management, as well as the objectives and scope of the audit of
financial statements. Despite management's desire for changes in the engagement letter, the
auditors found the proposed amendments unacceptable.

CA Y, known for his diligence and precision, believes in meticulous documentation of working
papers. He maintains a comprehensive file that records every aspect of the audit, including
procedures performed, evidence obtained, and conclusions reached during the process.

In formulating the audit program, CA Y recognized the importance of understanding the

internal control systems and their actual operations. An observation revealed that the company
has implemented a system involving the timely rotation of employees among different
departments, preventing any one employee from specializing in a single role.

Given the diverse range of transactions, CA Y decided to incorporate audit sampling in the audit
procedures. Audit sampling allows the auditor to obtain and evaluate evidence about specific
characteristics of selected items to draw conclusions about the entire population.

XYZ Associates, being on the panel of the Comptroller and Auditor General (C & AG), secured
the appointment as auditors for a government company, Pacific Utilities & Power Corporation
Ltd. Given that this was their inaugural government audit assignment, the auditors sought to
ensure a thorough understanding of the applicable provisions.

Furthermore, the auditors were keen on validating the robustness of their reporting procedures
to ensure a flawless reporting process. Recognizing it as both a right and an obligation, the
auditors aimed to provide a comprehensive report on the findings of their audit.

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MCQs:

6. If the auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall:

(a) Withdraw from the Audit Engagement where possible under applicable law or regulation.

(b) Determine whether there is any obligation, either contractual or otherwise to report the
circumstances to other parties, such as those charged with governance, owners or regulators.

(c) Withdraw from the audit engagement where possible under applicable law or regulation
and determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.

(d) The auditor shall mention such fact in the audit report while giving an unqualified opinion.

7. Audit Documentation may be recorded on paper or on electronic media. Which of the

following will not form a part of Audit Documentation?

(a) Audit Programmes

(b) E-mails concerning significant matters

(c) Letters of Confirmation & Representation

(d) Superseded drafts of working papers and financial statements

8. Article 151 requires that the reports of the C&AG relating to the accounts of the Union/State
shall be submitted to the_____________who shall cause them to be laid before House of
Parliament/State Legislature.

(a) Prime Minister/ Chief Minister

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(b) Union Finance Minister

(c) President/Governor

(d) Both a & b

9. Statement 1: Article 150 of the Constitution provides that the accounts of the Union and of
the States shall be kept in such form as the President may on the advice of the C&AG prescribe.

Statement 2: The Comptroller and Auditor General does not have any authority to audit the
accounts of stores and inventory kept in any office or department of the Union or of a State.

(a) Statement 1 is correct

(b) Statement 2 is correct

(c) Both the statements are correct

(d) None of the statement is correct

(2×4= 8 Marks)

GENERAL MCQS

10. What is the key criterion for determining whether a private limited company falls under the
exemption criteria for the Companies (Auditor's Report) Order, 2020?

(a) Paid-up capital and reserves and surplus not exceeding Rs. 180 crore.

(b) Total borrowings not exceeding Rs. 10 crore.

(c) Total revenue not exceeding Rs. 10 crore.

(d) Being a subsidiary or holding company of a public company.

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 (2 marks)

11. PQR Ltd., a government company in India, needs to appoint an auditor for its annual audit.
Who has the authority to appoint the auditor for PQR Ltd.?

A) The members (shareholders) in the Annual General Meeting (AGM).

B) The partners of PQR Ltd.

C) The Comptroller and Auditor General of India (CAG).

D) The government authority responsible for tax laws.

12. Statement 1: Audit strategy and audit plan are discrete processes with no interrelation.

Statement 2: Changes in the audit strategy may have consequential impacts on the audit plan.

Choose correct option

(A) Both statements are Correct

(B) Both statements are Incorrect

(C) Statement 1 Incorrect & Statement 2 Correct

(D) Statement 1 Correct & Statement 2 Incorrect

13. In the era of digitization, why are auditors increasingly incorporating digital technology,
such as artificial intelligence and data analytics, into their audit processes, and what benefits
does it offer?

A) Auditors are only using digital technology for planning purposes, as it does not contribute
significantly to the expression of the final opinion.

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B) Auditors are reluctant to adopt digital technology, considering it a distraction from
traditional audit methods.

C) Auditors utilize digital technology throughout the audit process, enhancing their
understanding of business processes, conducting more effective audits, and better identifying
risks.

D) Auditors solely rely on traditional audit methods, as they find digital tools too complex and
time-consuming.

14. A company, XYZ Ltd, engages a new auditor for the current financial year. The auditor
discovers that the financial statements for the prior period were audited by a predecessor
auditor from a different audit firm. The auditor is now tasked with auditing the opening
balances for the current period. What does SA 510 define as "opening balances" in the context
of an initial audit engagement?

A) Balances based on the closing balances of the current period

B) Balances reflecting the effects of transactions and events of the current period

C) Balances that existed at the beginning of the prior period

D) Balances requiring disclosure at the end of the current period

15. XYZ Ltd, a manufacturing company, recently acquired a new piece of machinery for its
production facility. The finance department is tasked with determining the cost of the acquired
property, plant, and equipment. The following elements are considered:

(a) Purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.

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(b) Costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management.

(c) The initial estimate of the costs of dismantling, removing the item, and restoring the site on
which it is located, referred to as decommissioning, restoration, and similar liabilities. What
elements constitute the cost of the acquired property, plant, and equipment?

A) (a) and (b)

B) (b) and (c)

C) (a) and (c)

D) (a), (b), and (c)

16. ABC Auditing Firm recently completed an audit engagement for XYZ Corporation. The lead
auditor, Sarah, is in charge of the finalization and retention of audit documentation. The firm
follows SQC 1 guidelines and has established policies and procedures for these processes. What
is the minimum recommended retention period for audit documentation for audit
engagements, as per SQC 1?

A) Three years from the date of the auditor's report

B) Five years from the date of the auditor's report

C) Seven years from the date of the auditor's report

D) Ten years from the date of the auditor's report

17. ABC Corporation, a family-owned business, is undergoing an audit conducted by XYZ Audit
Firm. Sarah, the lead auditor, is tasked with determining the appropriate persons with whom to

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communicate audit matters based on the diverse governance structure of ABC Corporation.
Who are considered "Those charged with governance" in the context of ABC Corporation?

A) Only executive members of the governance board

B) Only company directors

C) A supervisory board separate from the executive board

D) Persons or organization(s) overseeing the strategic direction and accountability of the entity

18. ABC Industries Ltd, a conglomerate operating in multiple sectors, engages audit firms for its
subsidiaries located in different regions. In this setup, Rajeev & Associates is appointed as the
principal auditor responsible for auditing the consolidated financial statements of ABC
Industries Ltd. However, the financial information of one subsidiary, Tech Innovations Pvt Ltd, is
audited by a local audit firm named Sarika Audit Services. Who is referred to as the "Other
auditor" in this context?

A) Sarika Audit Services

B) Rajeev & Associates

C) ABC Industries Ltd

D) Tech Innovations Pvt Ltd

19. What term is used to describe a lease where legal ownership remains with the lessor, but
risks and rewards are effectively transferred to the lessee?

A) Joint lease

B) Operating lease

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C) Finance lease

D) Cooperative lease

20. John, a professional accountant, is faced with a situation where he can manipulate financial
statements to benefit his company. He is aware of the moral principles and ethical
considerations governing his conduct. In the context, how should John approach the situation
he is facing?

A) Manipulate financial statements to benefit the company, as personal gain is important.

B) Ignore the moral principles and ethical considerations, as they are external impositions.

C) Act in accordance with moral principles and ethical considerations, as they are intrinsic.

D) Seek legal advice to determine the appropriate course of action.

(1×10= 10 Marks)

Division B

Question No.1 is compulsory.

Attempt any four questions from the remaining five questions

Q-1 Examine with reasons whether the following statements are correct or incorrect.

(a) The Standards on Auditing (SAs) apply to the audit of historical financial information, while
the Standards on Assurance Engagements (SAEs) which apply in assurance engagements other
than audits and review of historical financial information.

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(b) The primary objective of the auditor, as outlined in SA 560, is to obtain sufficient
appropriate audit evidence about events occurring before the date of the financial statements
and after the date of the auditor’s report that may require adjustment or disclosure.

(c) Application controls include both automated or manual controls that operate at a business
process level.

(d) Employee benefits expenses represent only the basic salary paid to employees and do not
include associated expenses such as perquisites/benefits, post-employment benefits, and
expenses related to hiring, welfare, and training.

(e) Drawing Power (DP) is the total exposure that a bank can take on a particular client for
facilities like cash credit, overdraft, export packing credit, and non-funded exposures. It is same
as Sanctioned Limit.

(f) The auditor shall express a qualified opinion when misstatements, individually or in the
aggregate, are material and pervasive to the financial statements.

(g) Independence of mind is the state of mind that allows an individual to provide an opinion
without being affected by influences that compromise professional judgment, allowing the
individual to act with integrity, exercise objectivity, and professional skepticism.

(h) Stratification involves dividing a population into discrete subpopulations with identifying
characteristics. Each subpopulation is called a stratum, and units under those sub populations
are referred to as strata.

(Answer any seven out of eight) (2×7= 14 Marks)

Q-2(a) Impracticable to Attend Physical Inventory Count Coccyx Ltd. supplies navy uniforms
across the country. The Company has 3 warehouses at different locations throughout the India
and 5 warehouses at the borders. The major stocks are generally supplied from the borders.
Coccyx Ltd. appointed M/s OPAQE & Co. to conduct its audit for the financial year 2021-22. Mr.

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P, partner of M/s OPAQE & Co., attended all the physical inventory counting conducted
throughout the India but could not attend the same at borders due to some unavoidable
reason.

You are required to advise M/s OPAQE & Co.,

(I) How sufficient appropriate audit evidence regarding the existence and condition of inventory
may be obtained?

(II) How is an auditor supposed to deal when attendance at physical inventory counting is
impracticable?

(4 marks)

Q-2(b) As an experienced auditor, you are tasked with constructing an audit programme for a
client. The client's internal controls have undergone significant changes since the previous
year's audit. Discuss the strategic considerations and steps you would undertake in developing
the audit programme, emphasizing the decision-making process regarding the reliance on
internal controls. Provide a comprehensive approach for the purpose of Constructing an audit
programme?

(4 marks)

Q-2(c) ABC Ltd., a manufacturing company, is undergoing its annual financial audit. The auditor
is tasked with designing and implementing an audit sample for testing certain financial
transactions. With reference to Standard on Auditing 530, state the requirements relating to
audit sampling, sample design, sample size and selection of items for testing.

(3 marks)

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Q-2(d) Give detailed explanation of the key differences between reasonable assurance and
limited assurance engagements, particularly focusing on the level of assurance offered and the
nature of the procedures conducted? Additionally, could you offer examples of each type of
engagement to illustrate these distinctions, highlighting the practical applications within the
realm of auditing and financial reporting?

(3 marks)

Q-3(a) Explain the significance of the assembly of the final audit file in the audit process,
considering the guidelines outlined in SQC 1 "Quality Control for Firms that perform Audits
and Review of Historical Financial Information, and other Assurance and related services."
Provide a detailed overview of the administrative process involved in assembling the final audit
file and the recommended time limit for its completion. Additionally, discuss the permissible
administrative changes that can be made during the final assembly process, with examples.

(4 marks)

Q-3(b) Your prestigious Chartered Accountancy firm has been entrusted with the audit
responsibilities for two branches of XYZ Bank located in the Industrial area. Recognizing these
branches as "advances oriented," elucidate your systematic approach for gathering substantive
evidence during the audit of advances. Advise how you would proceed to obtain evidence in
respect of audit of advances. Explain in detail.

(4 marks)

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Q-3(c) M/s XYZ Auditors have been appointed as auditors of LMN Corporation for the financial
year 2023-24. The processes, operations, accounting, and decisions are extensively
computerized in LMN Corporation. M/s XYZ Auditors understand that there are several aspects
they should consider to determine the level of automation and complexity in the business
environment of LMN Corporation. While planning the audit work, the engagement partners
discussed with the audit staff about the various types of controls in the automated
environment that are put in place to mitigate IT risks and to maintain the confidentiality,
integrity, availability, and security of data such as General IT Controls; Application Controls; and
IT-Dependent Controls.

You are required to briefly explain:

(i) General IT Controls.

(ii) Application Controls.

(iii) IT-Dependent Controls

(3 marks)

Q-3(d) Consider a scenario where a manufacturing company is facing increasing competition,

and there are pressures to meet aggressive revenue targets. The company's management, in an
attempt to boost reported profits, engages in fraudulent activities by inflating sales figures in
the financial statements. The finance department colludes to manipulate revenue recognition,
leading to a material misstatement in the financial statements. Identify and explain the
components of the risk of material misstatement.

(3 marks)

Q-4(a) You as a statutory auditor, having audited the financial statements of PQR Corporation, a
publicly listed entity, for the financial year 2022-23, you find that the comparative financial

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information is incorporated into the financial statements for the current financial year 2023-24.
To ensure that the comparative financial information is presented, in all material aspects,
following the requirements of the applicable financial reporting framework, outline the audit
procedures mandated by the relevant SA that you must undertake for this purpose.

(4 marks)

Q-4(b) As a professional accountant, you are faced with a challenging scenario that tests your
adherence to the fundamental principles of ethics. Consider a situation where you work for a
client who insists on presenting financial information in a way that may be misleading to
stakeholders. How would you navigate this situation, considering the fundamental principles
of ethics? Provide a step-by-step approach, highlighting the key actions you would take to
uphold ethical standards.

(4 marks)

Q-4(c) Explain the concept of analytical procedures as defined in SA 520 "Analytical

Procedures." In the context of SA 520, if analytical procedures reveal fluctuations or
relationships inconsistent with other relevant information or differing significantly from
expected values, what steps should the auditor take to investigate such differences?

(3 marks)

Q-4(d) Explain the provisions related to the appointment of auditors in a Multi-State Co-
operative Society as outlined in Section 70 of the Multi-State Co-operative Societies Act, 2002.
How are the first auditors appointed, and what happens if the board fails to exercise its powers
in this regard? Also explain the provisions related to subsequent auditor appointment?

(3 marks)

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Q-5(a) In the context of using the work of another auditor, explain the circumstances under
which a principal auditor may rely on the work of an auditor appointed for a branch component
without visiting the component and examining its books of account. Outline the key
procedures the principal auditor should follow to ensure the adequacy of the other auditor's
work, and discuss the circumstances under which the principal auditor might find it necessary
to personally visit the branch or component.

(4 marks)

Q-5(b) During the audit of Tirthankara Limited, CA. Shreyansh identified a significant risk in
cross-border lease transactions, absent from the management's risk assessment. After
inquiries, the audit team found the risk assessment process ineffective in capturing significant
risks. CA. Shreyansh believes these, combined with other potential internal control issues,
constitute significant deficiencies. The engagement partner disagrees, suggesting only actual
significant deficiencies should be communicated, not potential misstatements. Offer guidance
to CA. Shreyansh, providing examples of considerations auditors may use to determine if a
deficiency or combination of deficiencies in internal control rises to the level of a significant
deficiency.

(4 marks)

Q-5(c) ABC Ltd., a manufacturing company, approached XYZ Bank for a loan facility. As part of
the lending arrangement, ABC Ltd. agreed to provide security to XYZ Bank. The mode of
creation of security was carefully determined based on the nature of the assets involved.
Explore the scenario of ABC Ltd. and XYZ Bank's security creation, considering different modes
of Security. Explain any three modes of creation of security.

(3 marks)

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Q-5(d) OBC Ltd., a company undergoing a recurring audit by CA. Insightful, has experienced
various changes since the last audit engagement. The management of OBC Ltd. believes that
the terms of the audit engagement remain static over the years. CA. Insightful is contemplating
whether to revise the audit engagement terms or simply remind the entity of the existing
terms. Discuss the factors CA. Insightful should consider revise the terms of the audit
engagement or to remind the entity of existing terms.

(3 marks)

Q-6(a) XYZ Ltd., a company audited by CA. Raj, recently came under scrutiny for potential
fraudulent activities. During the audit, CA. Raj uncovered suspicious transactions that,
individually, did not reach the ₹1 crore threshold. However, when aggregated, they amounted
to a significant sum. According to the Companies Act, 2013, and the Companies (Audit and
Auditors) Rules, 2014, how should CA. Raj proceed with reporting these findings? Additionally,
discuss any other reporting obligations related to fraud that CA. Raj might need to consider, as
per the Companies Act and CARO, 2020.

(4 marks)

OR

Q-6(a) In the financial year 2020-21, MS PRT & Associates, the statutory auditors of MNO Ltd., a
power generating company with plants in the northeastern states, faced challenges during the
audit. The audit team encountered difficulty in acquiring adequate and relevant audit evidence
concerning a specific component in the consolidated financial statements. Notably, the auditor
was unable to obtain audit evidence related to the financial information concerning a joint

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venture investment (specifically in XYZ Ltd.), which represents a substantial portion, exceeding
90%, of the entity's net assets. In light of these circumstances, what type of opinion should the
statutory auditors issue?

(4 marks)

Q-6(b) You are appointed as an auditor for "Helping Hands Foundation," a non-governmental
organization (NGO) registered under the Societies Registration Act, 1860. The organization is
actively involved in various social welfare projects and operates in compliance with applicable
laws. During your audit planning, outline the key considerations you would undertake based on
the provisions relating to the audit of NGOs.

(4 marks)

Q-6(c) LMN Ltd. recently conducted a share issuance, securing funds through the issuance of
shares at a premium, in strict compliance with the provisions detailed in Section 52 of the
Companies Act, 2013. As per this section, the company is obligated to allocate the proceeds
received as securities premium to the securities premium account. Offer advice on the
permissible methods by which the accumulated amount in the securities premium account can
be effectively employed.

(3 marks)

Q-6(d) XYZ Corp., a multinational conglomerate, is preparing for its upcoming annual audit. The
audit team understands that planning is not a one-time event but a continuous and iterative
process. The team is keen on implementing a robust planning strategy and considering various
factors before diving into risk assessment. As the lead auditor, outline the points need to

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consider, prior to the auditor’s identification and assessment of the risks of material
misstatement.

(3 marks)

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