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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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Case Study I

1. Answer: (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.

Reason:

The remuneration of auditors in banking companies is determined by the company in a general

meeting or in a manner decided by the company, as per the provisions of Section 142 of the
Companies Act, 2013. This provides flexibility for the company and its shareholders to decide
on the appropriate remuneration structure for auditors based on their judgment and
considerations. Therefore, options (a), (c), and (d) are incorrect.

2. Answer: (c) Statement on the adequacy of internal controls

Reason:

The auditor's report for a nationalized bank typically includes an opinion on whether the
financial statements present a true and fair view, confirmation that transactions have been
made within the bank's powers, and disclosure of any unaudited branches. However, a detailed
statement on the adequacy of internal controls is not explicitly required in the auditor's report
for a nationalized bank. The assessment of internal controls is part of the overall audit process,
but the specific statement on adequacy might not be a mandatory component of the auditor's
report.

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

Reason:

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The key difference lies in the reporting requirements related to the Companies (Auditor's
Report) Order, 2020. Under the Companies Act, 2013, companies are required to comply with
the provisions of this order, which includes additional reporting requirements. However, banks,
as defined in clause (c) of Section 5 of the Banking Regulation Act, 1949, are exempt from the
reporting requirements of the Companies (Auditor's Report) Order, 2020. Therefore, option (c)
reflects the correct distinction between the two acts regarding auditor reporting.

4. Answer: (d) All of the above

Reason:

Each of the options (a), (b), and (c) represents a crucial aspect when auditing a bank's loan
portfolio:

(a) The adequacy of credit risk assessment procedures: This is essential to ensure that the bank
has robust procedures in place to assess the credit risk associated with its loans.

(b) The accuracy of loan loss provisioning: This involves verifying whether the bank has
adequately provided for potential losses on loans, ensuring that the financial statements reflect
the true and fair view of the bank's financial position.

(c) Compliance with RBI guidelines on NPA recognition: Banks must adhere to regulatory
guidelines, and non-compliance can have significant implications. Ensuring compliance with RBI
guidelines on Non-Performing Asset (NPA) recognition is crucial for an accurate audit.

Therefore, option (d) "All of the above" is the correct answer, as each consideration is vital for a
comprehensive audit of a bank's loan portfolio.

5. (b) 30th June every year

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Reason:

The Statutory Central Auditors are required to submit the Long Form Audit Report (LFAR) to
banks latest by 30th June every year, as mentioned in the information provided. This deadline
ensures timely reporting and allows for proper planning for the completion of the LFAR.

(2×5= 10 Marks)

Case Study II

6. Answer: (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.

Reason:

If the auditor is unable to agree to a change in the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor should
consider withdrawing from the engagement where possible under applicable law or regulation.
Additionally, the auditor should assess whether there is any obligation, either contractual or
otherwise, to report the circumstances to other relevant parties, such as those charged with
governance, owners, or regulators. This ensures transparency and compliance with professional
and legal responsibilities. Simply mentioning the fact in the audit report without taking
appropriate actions may not be sufficient to address the situation or fulfill the auditor's
responsibilities.

7. Answer: (d) Superseded drafts of working papers and financial statements.

Reason:

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Audit documentation serves as the primary record of the audit process, supporting the
auditor's conclusions and procedures. It should be clear, concise, and organized for easy review
and understanding.

Audit programs outline the planned audit procedures for each area of the financial statements.
They are crucial for ensuring a comprehensive and efficient audit.

Emails concerning significant matters can document important discussions and decisions made
during the audit. They can also serve as evidence of communication with management or other
stakeholders.

Letters of confirmation and representation are used to obtain external evidence supporting the
accuracy and completeness of the financial statements. They are essential for certain audit
procedures.

Superseded drafts of working papers and financial statements are not considered permanent
audit documentation. They may contain errors or incomplete information and can be confusing
or misleading if not properly discarded.

Therefore, while all the other options listed are essential components of audit documentation,
superseded drafts should not be retained as they do not represent the final conclusions and
procedures of the audit.

Here are some additional points to consider:

Audit documentation should be retained for a specified period depending on the relevant
professional standards and regulations.

Electronic audit documentation should be secure and accessible to authorized personnel only.

Proper documentation practices are essential for maintaining audit quality and protecting the
auditor from legal liability.

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8. Answer: (c) President/Governor.

Reason:

Article 151 of the Indian Constitution states that the reports of the Comptroller and Auditor
General (C&AG) relating to the accounts of the Union or of the States shall be submitted to the
President, or the Governor of the State, who shall cause them to be laid before the House of
Parliament or the Legislature of the State, respectively.

So, the reports are submitted to the constitutional head (President for the Union and Governor
for the State), and they are responsible for causing these reports to be laid before the
respective legislative bodies. Options (a) Prime Minister/Chief Minister and (b) Union Finance
Minister are not correct in this context as the constitutional responsibility lies with the
President/Governor.

9. Answer: (a) Statement 1 is correct.

Reason:

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 Comptroller and
Auditor General (C&AG), prescribe. This statement is correct. The C&AG has a significant role in
the audit and accounting processes as prescribed by the Constitution.

Statement 2: The second statement is not correct. The Comptroller and Auditor General (C&AG)
does have the authority to audit the accounts, including stores and inventory, of any office or
department of the Union or of a State. The C&AG is responsible for auditing government
expenditures and ensuring transparency and accountability in the financial affairs of the
government.

Therefore, the correct answer is (a) Statement 1 is correct.

(2×4= 8 Marks)

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GENERAL MCQS

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

Reason:

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

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

As per the information provided in the Companies (Auditor's Report) Order, 2020, a private
limited company is exempted from the order if it meets the following conditions:

Paid-up capital and reserves and surplus not more than Rs. 1 crore.

Total borrowings not more than Rs. 1 crore.

Total revenue not more than Rs. 10 crore.

Therefore, the correct answer is (c) Total revenue not exceeding Rs. 10 crore.

(2 marks)

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

Reason:

According to Section 139(7) of the Companies Act, 2013, the CAG has the authority to appoint
the auditor for government companies in India. This includes appointing the initial auditor and
reappointing subsequent auditors.

Here's why the other options are incorrect:

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A) The members (shareholders) in the Annual General Meeting (AGM): While shareholders
have the right to appoint auditors in other types of companies, this is not the case for
government companies in India.

B) The partners of ABC Ltd.: PQR Ltd. is stated to be a company, not a partnership. Partners are
associated with partnerships, not companies.

D) The government authority responsible for tax laws: While the government has a role in
overseeing companies, the specific responsibility for appointing the auditor for government
companies in India lies with the CAG.

Therefore, considering the specific situation of PQR Ltd. being a government company in India,
the authority to appoint its auditor rests with the Comptroller and Auditor General of India.

12. Answer: C) Statement 1 Incorrect & Statement 2 Correct

Reason:

Statement 1: This statement is incorrect. Audit strategy and audit plan are not discrete
processes. In fact, the audit strategy informs and guides the development of the audit plan. The
strategy sets the overall scope, timing, and direction for the audit, while the plan translates
these into specific procedures and tasks. They are interrelated and interdependent.

Statement 2: This statement is correct. Any changes made to the audit strategy will likely have
consequences for the audit plan. For example, if the auditor decides to increase the focus on a
certain area due to a higher identified risk, the corresponding tests and procedures in the plan
will need to be adjusted.

Therefore, statement 1 is incorrect because the processes are connected, while statement 2 is
correct because changes in the strategy impact the plan. This makes C) the correct option.

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

Reason:

Increasingly complex data: Organizations now generate and handle massive amounts of digital
data, making traditional audit methods less efficient and effective.

Enhanced efficiency and analysis: Digital tools, like AI and data analytics, can automate
repetitive tasks, analyze large datasets for anomalies, and provide insights traditional methods
might miss.

Risk identification and mitigation: Technology can help identify potential risks lurking within
the data, allowing auditors to focus their efforts on areas with higher risk for fraud or errors.

Improved understanding of business processes: By analyzing operational data, auditors gain a

deeper understanding of how a business functions, leading to more informed audit procedures.

While digital technology has limitations, and traditional methods still hold value, option C
accurately reflects the trend of auditors increasingly incorporating and benefiting from
technology throughout the audit process.

Here's why the other options are incorrect:

A) False. Digital technology is used far beyond planning and plays a crucial role in performing
and concluding an audit.

B) False. While some adapt slower, most auditing firms and professionals understand the
advantages of technology and are actively integrating it.

D) False. Technology's ability to reduce time and effort through automation makes it beneficial,
not complex or time-consuming.

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Therefore, option C represents the current shift towards leveraging technology for more
effective and insightful audits in the digital age.

14. Answer: C) Balances that existed at the beginning of the prior period

Reason:

According to SA 510, "opening balances" are those account balances that exist at the beginning
of the period. These balances are based upon the closing balances of the prior period and
reflect the effects of transactions and events of prior periods and accounting policies applied in
the prior period. Therefore, option C correctly defines opening balances in the context of an
initial audit engagement. Options A, B, and D do not accurately represent the definition
provided by SA 510.

15. Answer: D) (a), (b), and (c)

Reason:

The cost of an item of property, plant, and equipment comprises:

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

(b) Any 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.

Therefore, option (D) correctly includes all three elements that constitute the cost of the
acquired property, plant, and equipment.

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16. Answer: C) Seven years from the date of the auditor's report.

Reason:

SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation.

The retention period for audit engagements, as per SQC 1, is ordinarily no shorter than seven
years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

Therefore, option C) Seven years from the date of the auditor's report is the minimum
recommended retention period for audit documentation for audit engagements, according to
SQC 1. This ensures that the audit documentation is retained for an adequate period,
facilitating compliance with regulatory requirements and providing support for any potential
future audits or inquiries.

17. Answer: D) Persons or organization(s) overseeing the strategic direction and

accountability of the entity

Reason:

"Those charged with governance" are defined as the person(s) or organization(s) with
responsibility for overseeing the strategic direction of the entity and obligations related to its
accountability, including overseeing the financial reporting process.

This may include various structures such as executive members of a governance board,
company directors, a supervisory board separate from the executive board, or an owner-
manager.

In the context of ABC Corporation, which is a family-owned entity, the appropriate persons with
governance responsibilities may vary.

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Therefore, option D correctly represents "Those charged with governance" in the context of
ABC Corporation.

18. Answer: A) Sarika Audit Services

Reason:

The "Other auditor" is an auditor, other than the principal auditor, with responsibility for
reporting on the financial information of a component that is included in the financial
information audited by the principal auditor. In this scenario, Sarika Audit Services is the other
auditor as it reports on the financial information of the subsidiary, Tech Innovations Pvt Ltd,
which is a component included in the consolidated financial statements audited by the principal
auditor, Rajeev & Associates.

This case study illustrates the roles of the principal auditor and the other auditor in a scenario
where multiple audit firms are involved in auditing the financial information of an entity and its
components.

19. Answer: C) Finance lease

Reason:

In a finance lease, legal ownership of the asset typically remains with the lessor, but the
substantial transfer of risks and rewards associated with ownership is effectively transferred to
the lessee. This distinguishes a finance lease from an operating lease, where the lessee
primarily pays rent for the usage of the asset without assuming significant risks and rewards of
ownership. The term "finance lease" reflects the financial arrangement nature of such leases,
where it is, in substance, a financing arrangement rather than a simple rental agreement.

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

Reason:

Professional Code of Conduct: As a professional accountant, John is bound by a code of

conduct that emphasizes integrity, objectivity, and professional competence. Manipulating
financial statements would violate these core principles.

Legal and Regulatory Implications: Financial statement manipulation can lead to substantial
legal and regulatory consequences, including fines, imprisonment, and career sanctions.

Personal Reputation and Career: Engaging in unethical conduct can damage John's personal
reputation and professional standing within the accounting community.

Long-Term Harm: Manipulating financial statements can harm stakeholders, including

investors, creditors, and employees, by providing them with inaccurate and misleading
information. This can have serious consequences for the company's financial stability and
reputation.

While seeking legal advice might offer insights into potential legal ramifications, the decision
itself should rely on John's own internal ethical compass and commitment to professional
integrity.

Therefore, choosing Option C demonstrates an understanding of the importance of ethical

conduct and prioritizes upholding professional standards and personal values over short-term
benefits.

It's important to remember that ethical dilemmas have no simple solutions, but prioritizing
ethical principles, considering the potential consequences, and seeking guidance from reliable
resources can help professionals navigate challenging situations effectively.

(1×10= 10 Marks)

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 Division B

Ans1: (a) The statement is correct.

Explanation:

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

This statement accurately reflects the applicability of SAs and SAEs in the specified contexts.

(b) The statement is incorrect.

Explanation:

The primary objective of the auditor, as outlined in SA 560, is to obtain sufficient appropriate
audit evidence about events occurring between the date of the financial statements and the
date of the auditor’s report.

The focus is on subsequent events that may require adjustment of, or disclosure in, the
financial statements. Events occurring after the date of the auditor’s report are also considered
in responding appropriately to facts that become known to the auditor after the report's date.

The statement inaccurately includes events occurring before the date of the financial
statements, which is not the primary focus of SA 560.

(c) The statement is correct.

Explanation:

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Application controls include both automated and manual controls that operate at a business
process level.

These controls are implemented within IT applications, such as ERPs (Enterprise Resource
Planning systems), to ensure the completeness, accuracy, and integrity of data within those
systems.

Examples of application controls include edit checks, validation of input data, sequence number
checks, user limit checks, reasonableness checks, and mandatory data fields, all of which
contribute to the control and reliability of business processes within the application.

(d) The statement is incorrect.

Explanation:

Employee benefits expenses encompass not only the basic salary paid to employees but also
associated expenses such as perquisites/benefits, post-employment benefits (gratuity,
superannuation, leave encashment, provident fund contribution), and expenses related to
hiring, welfare, and training.

The term "employee benefits expenses" is comprehensive and includes various elements
beyond just the basic salary, reflecting the total compensation and costs associated with the
workforce.

(e) The statement is incorrect.

Explanation:

Drawing Power (DP) is not the total exposure that a bank can take on a particular client.
Instead, it is the limit up to which a firm or company can withdraw from the working capital
limit sanctioned.

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DP is calculated based on the primary security less margin as of a particular date, and it
represents the amount that the client can withdraw from the sanctioned working capital limit
without breaching the terms of the agreement.

The sanctioned limit, on the other hand, is the total exposure that a bank can provide to a
client, considering various facilities like cash credit, overdraft, export packing credit, and non-
funded exposures.

(f) The statement is incorrect.

Explanation:

The auditor shall express a qualified opinion when misstatements, individually or in the
aggregate, are material but not pervasive to the financial statements.

A pervasive misstatement is one that, in the auditor's professional judgment, is both material
and pervasive to the financial statements. A material misstatement, on the other hand, is one
whose omission or misstatement could influence the economic decisions of users taken on the
basis of the financial statements.

(g) The statement is correct.

Explanation:

Independence of mind is indeed the state of mind that enables an individual, typically an
auditor, to provide an opinion without being influenced by factors that could compromise
professional judgment.

This state of mind allows the individual to act with integrity, exercise objectivity, and maintain
professional skepticism, ensuring an unbiased and impartial approach in delivering opinions or
making professional decisions.

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(h) The statement is correct.

Explanation:

Stratification involves dividing a population into discrete subpopulations or strata based on

identifying characteristics. Each subpopulation is termed a stratum, and the individual units
within those subpopulations are referred to as strata. Stratification is a statistical method used
to ensure a representative sample by considering and analyzing different strata separately.

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

Ans-2(a) (I) Special Consideration with Regard to Inventory: As per SA 501 "Audit Evidence-
Specific Considerations for Selected Items", when inventory is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:

> Evaluate management's instructions and procedures for recording and controlling the results
of the entity's physical inventory counting;

> Observe the performance of managements count procedures;

> Inspect the inventory; and

> Perform test counts; and

(b) Performing audit procedures over the entity's final inventory records to determine whether
they accurately reflect actual inventory count results.

(II) Attendance at Physical Inventory Counting Not Practicable:

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• In some cases: - Attendance at physical inventory counting may be impracticable. This may be
due to factors such as the nature and location of the inventory,

• For example: - Where inventory is held in a location that may pose threats to the safety of the
auditor. The matter of general inconvenience to the auditor, however, is not sufficient to
support a decision by the auditor that attendance is impracticable.

• As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing": The matter of difficulty, time, or cost involved is
not in itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than persuasive.

• Where attendance is impracticable: - Alternative audit procedures, for example, inspection of

documentation of the subsequent sale of specific inventory items acquired or purchased prior
to the physical inventory counting, may provide sufficient appropriate audit evidence about the
existence and condition of inventory.

• Reporting: -In some cases, though, it may not be possible to obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by performing alternative
audit procedures. In such cases, SA 705 on Modifications to the Opinion in the Independent
Auditor's Report requires the auditor to modify the opinion in the auditor's report as a result of
the scope limitation.

(4 marks)

Ans-2(b) The audit planning ideally commences at the conclusion of the previous year’s audit,
and along with the related programme, it should be reconsidered for modification as the audit
progresses. Such consideration is based on the auditor’s review of the internal control, his
preliminary evaluation thereof, and the results of his compliance and substantive procedures.

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While developing an audit programme, the auditor may conclude that relying on certain
internal controls is an effective and efficient way to conduct his audit.

However, the auditor may decide not to rely on internal controls when there are other more
efficient ways of obtaining sufficient appropriate audit evidence. The auditor should also
consider the timing of the procedures, the coordination of any assistance expected from the
client, the availability of assistants, and the involvement of other auditors or experts.

Further, the auditor normally has flexibility in deciding when to perform audit procedures.
However, in some cases, the auditor may have no discretion as to timing, for example, when
observing the taking of inventories by client personnel or verifying the securities and cash
balances at the year-end.

For the purpose of programme construction, the following points should be kept in mind:

(1) Stay within the scope and limitation of the assignment.

(2) Prepare a written audit programme setting forth the procedures that are needed to
implement the audit plan.

(3) Determine the evidence reasonably available and identify the best evidence for deriving the
necessary satisfaction.

(4) Apply only those steps and procedures which are useful in accomplishing the verification
purpose in the specific situation.

(5) Include the audit objectives for each area and sufficient details which serve as a set of
instructions for the assistants involved in audit and help incontrolling the proper execution of
the work.

(6) Consider all possibilities of error.

(7) Co-ordinate the procedures to be applied to related items.

(4 marks)

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Ans-2(c) Audit Sampling: As per SA 530 on “Audit Sampling”, the meaning of the term Audit
Sampling is – the application of audit procedures to less than 100% of items within a population
of audit relevance such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population.

The requirements relating to sample design, sample size and selection of items for testing are
explained below-

Sample design - When designing an audit sample, the auditor shall consider the purpose of the
audit procedure and the characteristics of the population from which the sample will be drawn.

Sample Size- The auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.

Selection of Items for Testing- The auditor shall select items for the sample in such a way that
each sampling unit in the population has a chance of selection.

In conclusion, adherence to SA 530 ensures that the audit sampling process for ABC Ltd. is
systematic, well-designed, and tailored to achieve the specific objectives of the audit
procedure. The auditor's considerations encompass the purpose of the audit, characteristics of
the population, determination of an appropriate sample size, and the unbiased selection of
items for testing.

(3 marks)

Ans-2(d) Key Differences between Reasonable Assurance and Limited Assurance engagement

Reasonable assurance engagement Limited assurance engagement

Reasonable assurance engagement provides Limited assurance engagement provides lower
high level of assurance. level of assurance than reasonable assurance
engagement.
It performs elaborate and extensive It performs fewer procedures as compared to

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procedures to obtain sufficient appropriate reasonable assurance engagement.
evidence.
Example of reasonable assurance engagement Example of limited assurance engagement is
is an audit engagement. review engagement.

In summary, the key distinctions between reasonable assurance and limited assurance
engagements lie in the level of assurance offered and the nature of the procedures conducted.
Reasonable assurance engagements involve exhaustive procedures to provide a high level of
confidence, while limited assurance engagements employ a more focused approach to deliver a
moderate level of confidence. Audits and reviews serve as prime examples of these respective
engagements, illustrating the practical application of these concepts in the auditing profession.

(3 marks)

Ans-3(a) Assembly of the Final Audit File

The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report.

SQC 1 “Quality Control for Firms that perform Audits and Review of Historical Financial
Information, and other Assurance and related services”, requires firms to establish policies
and procedures for the timely completion of the assembly of audit files.

An appropriate time limit within which to complete the assembly of the final audit file is
ordinarily not more than 60 days after the date of the auditor’s report. The completion of the
assembly of the final audit file after the date of the auditor’s report is an administrative process
that does not involve the performance of new audit procedures or the drawing of new
conclusions.

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Changes may, however, be made to the audit documentation during the final assembly process,
if they are administrative in nature.

Examples of such changes include:

• Deleting or discarding superseded documentation.

• Sorting, collating and cross-referencing working papers.

• Signing off on completion checklists relating to the file assembly process.

• Documenting audit evidence that the auditor has obtained, discussed and agreed with the
relevant members of the engagement team before the date of the auditor’s report.

After the assembly of the final audit file has been completed, the auditor shall not delete or
discard audit documentation of any nature before the end of its retention period.

SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than seven
years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

In summary, the assembly of the final audit file is a crucial administrative task that ensures the
integrity and compliance of audit documentation with professional standards, contributing to
the overall quality and reliability of the audit process.

(4 marks)

Ans-3(b) Audit of Advances: Advances generally constitute the major part of the assets of the
bank. There are large number of borrowers to whom variety of advances are granted. The audit
of advances requires the major attention from the auditors.

In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence
about the following:

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a. Amounts included in balance sheet in respect of advances are outstanding at the date of the
balance sheet.

b. Advances represent amount due to the bank.

c. Amounts due to the bank are appropriately supported by Loan documents and other
documents as applicable to the nature of advances.

d. There are no unrecorded advances.

e. The stated basis of valuation of advances is appropriate and properly applied, and that the
recoverability of advances is recognised in their valuation.

f. The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.

g. Appropriate provisions towards advances have been made as per the RBI norms, Accounting

Standards and generally accepted accounting practices.

The auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances, and by:

• examining the validity of the recorded amounts;

• examining loan documentation;

• reviewing the operation of the accounts;

• examining the existence, enforceability and valuation of the security;

• checking compliance with RBI norms including appropriate classification and provisioning; and

• carrying out appropriate analytical procedures.

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In carrying out his substantive procedures, the auditor should examine all large advances while
other advances may be examined on a sampling basis. The accounts identified to be problem
accounts however need to be examined in detail unless the amount involved is insignificant.

Advances which are sanctioned during the year or which are adversely commented by RBI
inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be
included in the auditor’s review.

(4 marks)

Ans-3(c) The controls that are put in place to mitigate the IT risks and to maintain the
confidentiality, integrity, availability and security of data are General IT Controls, Application
Controls and IT-Dependent Controls.

(i) General IT Controls: “General IT controls are policies and procedures that relate to many
applications and support the effective functioning of application controls. They apply to
mainframe, miniframe, and end-user environment. General IT controls that maintain the
integrity of information and security of data commonly include controls over the following:” (SA
315)

• Data centre and network operations;

• System software acquisition, change and maintenance

• Program change;

• Access security;

• Application system acquisition, development, and maintenance (Business Applications).

These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General IT
controls are known as “pervasive” controls or “indirect” controls.

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(ii) Application Controls: Application controls include both automated or manual controls that
operate at a business process level. Automated Application controls are embedded into IT
applications viz., ERPs and help in ensuring the completeness, accuracy and integrity of data in
those systems. Examples of automated applications include edit checks and validation of input
data, sequence number checks, user limit checks, reasonableness checks, mandatory data
fields.

(iii) IT dependent Controls: IT dependent controls are basically manual controls that make use
of some form of data or information or report produced from IT systems and applications. In
this case, even though the control is performed manually, the design and effectiveness of such
controls depends on the reliability of source data. Due to the inherent dependency on IT, the
effectiveness and reliability of automated application controls and IT dependent controls
require the General IT controls to be effective.

(3 marks)

Ans-3(d) Risks of material misstatement

SA 200 states that risk of material statement is the risk that the financial statements are
materially misstated prior to audit. It simply means that there is a probability of frauds or errors
in financial statements before audit.

Misstatement refers to a difference between the amount, classification, presentation, or

disclosure of a reported financial statement item and the amount, classification, presentation,
or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud.

Components of risk of material misstatement

The risk of material misstatement at assertion level comprises of two components i.e., inherent
risk and control risk. Both inherent risk and control risk are the entity’s risks and they exist

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independently of the audit of financial statements. Inherent risk and control risk are influenced
by the client. These are entity’s risks and are not influenced by the auditor.

Inherent risk

Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or
disclosure to a misstatement that could be material, either individually or when aggregated
with other misstatements before consideration of any related controls as described in SA-200.
There is always a risk that before considering any existence of internal control in an entity, a
particular transaction, balance of an account or a disclosure required to be made in the
financial statements of an entity have a chance of being misstated and such misstatement can
be material. This risk is known as inherent risk.

Inherent risk is higher for some assertions and related classes of transactions, account balances,
and disclosures than for others. For example, it may be higher for complex calculations.
Inherent risk factors are considered while designing tests of controls and substantive
procedures. Category of auditor’s assessment lower or higher, each category covers a range of
degrees of inherent risk. Auditor may assess the inherent risk of two different assertions as
lower while recognizing that one assertion has less inherent risk than the other, although both
have been assessed as lower.

It is important to consider the reason for each identified inherent risk even if the risk is lower,
when auditor designs tests of controls and substantive procedures. External circumstances
giving rise to business risks may also influence inherent risk. For example, technological
developments might make a particular product obsolete. Factors in the entity and its
environment may also influence the inherent risk related to a specific assertion.

Control risk

In accordance with SA-200, control risk is the risk that a misstatement that could occur in an
assertion about a class of transaction, account balance or disclosure and that could be material,
either individually or when aggregated with other misstatements, will not be prevented, or
detected and corrected, on a timely basis by the entity’s internal control.

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Control risk is a risk that internal control existing and operating in an entity would not efficient
enough to stop from happening, or find and then rectify in an appropriate time, any material
misstatement relating to a transaction, balance of an account or disclosure required to be made
in the financial statements of that entity. Therefore, in a way, it can be said that there exists an
inverse relation between control risk and efficiency of internal control of an entity. When
efficiency of internal control of an entity is high, the control risk is low and when efficiency of
internal control of that entity is low, the control risk is high.

(3 marks)

Ans-4(a) Auditor Responsibilities in Respect of comparative information

As per SA 710 "Comparative Information Corresponding figures and Comparative Financial

Statements", in respect of corresponding figures, the auditor shall determine whether the
financial statements include the comparative information required by the applicable financial
reporting framework and whether such information is appropriately classified.

(1) For this purpose, the auditor shall evaluate whether:

(i) The comparative information agrees with the amounts and other disclosures presented in
the prior period; and

(ii) The accounting policies reflected in the comparative information are consistent with those
applied in the current period or, if there have been changes in accounting policies, whether
those changes have been properly accounted for and adequately presented and disclosed.

(2) If the auditor becomes aware of a possible material misstatement in the comparative
information while performing the current period audit, the auditor shall perform such
additional audit procedures as are necessary in the circumstances to obtain sufficient
appropriate audit evidence to determine whether material misstatement exists.

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(3) If the auditor had audited the prior period's financial statements, the auditor shall also
follow the relevant requirements of SA 560 "Subsequent Events".

(4) As required by SA 580, "Written Representations", the auditor shall request written
representations for all periods referred to in the auditor's opinion. The auditor shall also obtain
a specific written representation regarding any prior period item that is separately disclosed in
the current year's statement of profit and loss.

(4 marks)

Ans-4(b) Step-by-step approach to navigating the challenging scenario where a client insists on
presenting financial information in a way that may be misleading to stakeholders, while
considering the fundamental principles of ethics:

Integrity

A professional accountant shall comply with the principle of integrity, which requires an
accountant to be straightforward and honest in all professional and business relationships.
Integrity implies fair dealing and truthfulness. A professional accountant shall not knowingly be
associated with reports, returns, communications or other information where the accountant
believes that the information contains a materially false or misleading statement; contains
statements or information provided negligently or omits or obscures required information
where such omission or obscurity would be misleading.

Objectivity

The principle of objectivity requires an auditor not to compromise professional judgment

because of bias, conflict of interest or undue influence of others. It requires that a professional
accountant shall not undertake a professional activity if a circumstance or relationship unduly
influences the accountant’s professional judgment regarding that activity.

Professional competence and due care

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A professional accountant shall comply with the principle of professional competence and due
care, which requires an accountant to attain and maintain professional knowledge and skill at
the level required to ensure thata client or employing organization receives competent
professional service, based on current technical and professional standards and relevant
legislation; and act diligently and in accordance with applicable technical and professional
standards. Diligence includes responsibility to act carefully, thoroughly and on a timely basis in
accordance with requirements of an assignment.

Confidentiality

Confidentiality principle requires a professional accountant to respect the confidentiality of

information acquired as a result of professional or business relationships. Confidentiality serves
the public interest because it facilitates the free flow of information from the professional
accountant’s client or employing organization to the accountant with the understanding that
the information will not be disclosed to a third party.

However, such confidential information may be disclosed, for example, when it is required by
law, when it is permitted by law and is authorised by the client or employer or there is a
professional duty or right to disclose when not prohibited by law.

Professional Behaviour

It requires an accountant to comply with relevant laws and regulations and avoid any conduct
that the accountant knows or should know might discredit the profession. A professional
accountant shall not knowingly engage in any employment, occupation or activity that impairs
or might impair the integrity, objectivity or good reputation of the profession, and as a result
would be incompatible with the fundamental principles.

By following these steps, a professional accountant can navigate the ethical challenges posed
by a client's insistence on presenting misleading financial information while adhering to the
fundamental principles of ethics.

(4 marks)

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Ans-4(c) Analytical procedures, as per SA 520, involve the evaluation of financial information by
analyzing plausible relationships among both financial and non-financial data. These procedures
may include an investigation of identified fluctuations or relationships that deviate significantly
from other relevant information or expected values.

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:

(i) Inquiring of management and obtaining appropriate audit evidence relevant to

management’s responses: Audit evidence relevant to management’s responses may be
obtained by evaluating those responses taking into account the auditor’s understanding of the
entity and its environment, and with other audit evidence obtained during the course of the
audit.

(ii) Performing other audit procedures as necessary in the circumstances: The need to perform
other audit procedures may arise when, for example, management is unable to provide an
explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.

This dual approach of inquiring with management and, if needed, performing additional audit
procedures ensures a thorough investigation into the identified fluctuations or relationships,
aligning with the principles outlined in SA 520.

(3 marks)

Ans-4(d) Section 70 of the Multi-State Co-operative Societies Act, 2002 provides that the first
auditor or auditors of a Multi-State cooperative society shall be appointed by the board within
one month of the date of registration of such society and the auditor or auditors so appointed
shall hold office until the conclusion of the first annual general meeting. If the board fails to

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exercise its powers under this sub-section, the Multi-State co-operative society in the general
meeting may appoint the first auditor or auditors.

The subsequent auditor or auditors are appointed by Multi-State co-operative society, at each
annual general meeting. The auditor or auditors so appointed shall hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting.

(3 marks)

Ans-5(a) Using the Work of another Auditor: When the accounts of the branch are audited by
a person other than the company’s auditor (or principal auditor), there is need for a clear
understanding of the role of such other auditor and the company’s auditor in relation to the
audit of the accounts of the branch and the audit of the company as a whole; also, there is
great necessity for a proper rapport between these two auditors for the purpose of an effective
audit. In recognition of these needs, the Council of the Institute of Chartered Accountants of
India has dealt with these issues in SA 600, “Using the Work of another Auditor”. It makes
clear that in certain situations, the statute governing the entity may confer a right on the
principal auditor to visit a component and examine the books of account and other records of
the said component, if he thinks it necessary to do so. Where another auditor has been
appointed for the component, the principal auditor would normally be entitled to rely upon the
work of such auditor unless there are special circumstances to make it essential for him to visit
the component and/or to examine the books of account and other records of the said
component. Further, it requires that the principal auditor should perform procedures to obtain
sufficient appropriate audit evidence, that the work of the other auditor is adequate for the
principal auditor's purposes, in the context of the specific assignment.

When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:

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(a) Advise the other auditor of the use that is to be made of the other auditor's work and report
and make sufficient arrangements for co-ordination of their efforts at the planning stage of the
audit. The principal auditor would inform the other auditor of matters such as are as requiring
special consideration, procedures for the identification of inter -component transactions that
may require disclosure and the time-table for completion of audit; and

(b) Advise the other auditor of the significant accounting, auditing and reporting requirements
and obtain representation as to compliance with them.

The principal auditor might discuss with the other auditor the audit procedures applied or
review a written summary of the other auditor’s procedures and findings which may be in the
form of a completed questionnaire or check-list. The principal auditor may also wish to visit the
other auditor. The nature, timing and extent of procedures will depend on the circumstances of
the engagement and the principal auditor's knowledge of the professional competence of the
other auditor. This knowledge may have been enhanced from the review of the previous audit
work of the other auditor.

(4 marks)

Ans-5(b) (i) Significant deficiencies: - As per SA 265 "Communicating Deficiencies in Internal

Control to Those Charged with Governance and Management", significant deficiency in
internal control means:

• A deficiency or combination of deficiencies in internal control that, in the auditor's

professional judgement, is of sufficient importance to merit the attention of those charged with
governance.

• Also, the significance of a deficiency or a combination of deficiencies in internal control

depends not only on whether a misstatement has actually occurred but also on the likelihood
that a misstatement could occur and the potential magnitude of the misstatement. Significant

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deficiencies may therefore exist even though the auditor has not identified misstatements
during the audit.

(ii) Examples of matters that auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:

• The likelihood of the deficiencies leading to material misstatements in the financial

statements in the future.

• The susceptibility to loss or fraud of the related asset or liability.

• The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.

• The financial statement amounts exposed to the deficiencies.

• The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.

(4 marks)

Ans-5(c) ABC Ltd.'s collaboration with XYZ Bank for a loan facility involved a meticulous
selection of security creation modes, aligning with the nature of the assets. Key modes of
creating security in this scenario are: (any three points)

Mortgage:

ABC Ltd. opted for a Registered Mortgage, formalized through a Mortgage Deed, for immovable
property. This provides XYZ Bank with a registered claim over the specified property, enhancing
the security.

Pledge:

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As part of the lending arrangement, ABC Ltd. engaged in pledging certain goods to XYZ Bank.
This involves delivering the goods to XYZ Bank, creating a specific charge. Despite the delivery,
legal ownership remains with ABC Ltd.

Hypothecation:

Moveable securities, such as stocks and debtors, were hypothecated to XYZ Bank. Through a
hypothecation agreement, ABC Ltd. granted an equitable charge to XYZ Bank without
transferring ownership or possession. Periodic reporting of asset statements helps determine
the drawing power.

Assignment:

ABC Ltd. utilized assignment to transfer actionable claims, such as book debts and life insurance
policies, to XYZ Bank. This mechanism provides XYZ Bank with absolute rights over the assigned
debts, enhancing the security position.

Set-off:

XYZ Bank, leveraging its statutory right of set-off, has the ability to adjust any debit balance in
ABC Ltd.'s account against credit balances in other accounts. This statutory right is a powerful
tool for consolidating accounts and managing overall liabilities.

Lien:

XYZ Bank, with the consent of ABC Ltd., created a legal charge through lien. This gives the bank
the right to seize and liquidate the asset under lien if necessary. Lien provides an additional
layer of security with the owner's agreement.

In conclusion, the diverse modes of security creation employed by ABC Ltd. in collaboration
with XYZ Bank showcase a comprehensive approach, ensuring a robust and tailored security
framework for the lending relationship. Each mode serves specific purposes, contributing to the
overall risk management strategy of the lending institution.

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 (3 marks)

Ans-5(d) Recurring audit is an audit which is performed by an auditor over years. On recurring
audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing
terms of the audit engagement.

In deciding whether to revise the terms of the audit engagement or simply remind OBC Ltd. of
the existing terms, CA. Insightful should consider several key factors to ensure the audit
engagement remains effective and aligned with the company's evolving circumstances. The
following factors should be carefully assessed:

(i) Any indication that the entity misunderstands the objective and scope of the audit.

(ii) Any revised or special terms of the audit engagement.

(iii) A recent change of senior management.

(iv) A significant change in ownership.

(v) A significant change in nature or size of the entity’s business.

(vi) A change in legal or regulatory requirements.

(vii) A change in the financial reporting framework adopted in the preparation of

the financial statements.

(viii) A change in other reporting requirements.

(3 marks)

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Ans-6(a) CA. Raj, the auditor of XYZ Ltd., faces a scenario where potentially fraudulent
transactions, individually below ₹1 crore, collectively form a significant amount. In accordance
with the Companies Act, 2013, and the Companies (Audit and Auditors) Rules, 2014, CA. Raj
should proceed as follows:

Reporting to the Central Government:

CA. Raj is obligated to report the suspected fraud to the Central Government since the
aggregated amount exceeds ₹1 crore. This reporting should be done within the specified time
and in the manner prescribed by Rule 13 of the Companies (Audit and Auditors) Rules, 2014.

Reporting to the Audit Committee or Board:

Simultaneously, CA. Raj should report the fraud to the audit committee (if constituted under
section 177) or the Board, given that the individual transactions fall below ₹1 crore. Compliance
with the prescribed time and manner requirements is essential in this reporting.

Additional Reporting Obligations under CARO, 2020:

CA. Raj needs to consider any reporting obligations related to fraud as outlined in point (xi) of
paragraph 3 of the Companies (Auditor’s Report) Order, 2020 (CARO, 2020). Matters specified
under CARO, 2020, pertaining to fraud should be included in the auditor's report to ensure
comprehensive disclosure.

By adhering to these steps, CA. Raj ensures compliance with both the Companies Act, 2013, and
CARO, 2020. The dual reporting—informing the Central Government about the aggregate
amount exceeding ₹1 crore and reporting to the audit committee or the Board for transactions
below this threshold—ensures a comprehensive response to the identified fraud. Additionally,
CA. Raj must fulfill any specific reporting requirements under CARO, 2020, to provide a detailed
overview of fraud-related matters in the auditor's report.

(4 marks)

OR

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Ans-6(a) M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about
the financial information of a joint venture investment that represents over 90% of the entity’s
net assets. The possible effects of this inability to obtain sufficient appropriate audit evidence
are both material and pervasive to the consolidated financial statements. Therefore, the
statutory auditor should issue a disclaimer of opinion.

The relevant extract of the Disclaimer of Opinion Paragraph and basis for Disclaimer of opinion
paragraph is as under:

Disclaimer of Opinion

We do not express an opinion on the accompanying financial statements of MNO Ltd. Because
of the significance of the matters described in the Basis for Disclaimer of Opinion section of our
report; we have not been able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on these financial statements.

Basis of Disclaimer of Opinion

The Group’s investment in its joint venture XYZ Company is carried at Rs.95 crores on the
Group’s consolidated balance sheet, which represents over 90% of the Group’s net assets as at
March 31, 2021.We were not allowed access to the management and the auditors of XYZ
Company, including XYZ Company’s auditors' audit documentation. As a result, we were unable
to determine whether any adjustments were necessary in respect of the Group's proportional
share of XYZ Company’s assets that it controls jointly, it’s proportional share of XYZ Company's
liabilities for which it is jointly responsible, its proportional share of XYZ’s income and expenses
for the year, (and the elements making up the consolidated statement of changes in equity) and
the consolidated cash flow statement.

(4 marks)

Ans-6(b) Helping Hands Foundation is a non-governmental organization registered under the

Societies Registration Act, 1860. The organization's mission is to contribute to various social

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causes and provide assistance to marginalized communities & conduct a comprehensive audit
in adherence to relevant statutes and regulations.

While planning the audit, the auditor may concentrate on the following:

(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and environment in
which it operate.

(ii) Updating knowledge of relevant statutes especially with regard to recent amendments,
circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 2010, Societies
Registration Act, 1860, Income Tax Act 1961 etc. and the Rules related to the statutes.

(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles
of Association, Rules and Regulations.

(iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals,
Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary
policies if any.

(v) Examination of minutes of the Board/Managing Committee/Governing Body/ Management

and Committees thereof to ascertain the impact of any decisions on the financial records.

(vi) Study the accounting system, procedures, internal controls and internal checks existing for
the NGO and verify their applicability.

(vii) Setting of materiality levels for audit purposes.

(viii) The nature and timing of reports or other communications.

(ix) The involvement of experts and their reports.

(x) Review the previous year’s Audit Report.

(4 marks)

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Ans-6(c) Shares Issued at Premium: In case a company has issued shares at a premium, that is,
at amount in excess of the nominal value of the shares, whether for cash or otherwise, section
52 of the Companies Act, 2013 provides that a Company shall transfer the amount received by
it as securities premium to securities premium account and state the means in which the
amount in the account can be applied. As per the section, where a company issues shares at a
premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium
received on those shares shall be transferred to a “securities premium account” and the
provisions of this Act relating to reduction of share capital of a company shall apply as if the
securities premium account were the paid-up share capital of the company.

Application of securities premium account: The securities premium account may be applied
by the Company:

(a) Towards the issue of unissued shares of the company to the members of the company as
fully paid bonus shares;

(b) In writing off the preliminary expenses of the Company;

(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company;

(d) In providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or

(e) For the purchase of its own shares or other securities under section 68.

The auditor needs to verify whether the premium received on shares, if any, has been
transferred to a “securities premium account” and whether the application of any amount out
of the said “securities premium account” is only for the purposes mentioned above

It's crucial for the company and its auditors to ensure that any application of the securities
premium account aligns with the permissible methods outlined in Section 52. Regular auditing
processes should verify compliance and the appropriate utilization of the premium amount for
the specified purposes

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 (3 marks)

Ans-6(d) Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of the previous
audit and continues until the completion of the current audit engagement. Planning, however,
includes consideration of the timing of certain activities and audit procedures that need to be
completed prior to the performance of further audit procedures. The audit team at XYZ Corp.
should meticulously consider the following elements during this dynamic planning process

1. The analytical procedures to be applied as risk assessment procedures.

2. Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.

3. The determination of materiality.

4. The involvement of experts.

5. The performance of other risk assessment procedures.

(3 marks)

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