ADVANCED AUDITING AND PROFESSIONAL ETHICS

FULL SYLLABUS TEST

SUGGESTED ANSWER / HINTS

A-1 MULTIPLE CHOICE QUESTIONS

1 (d) either a or b

2 (c) No, the responsibility for preparation and presentation of Financial statement is that of
management and the audit of financial statements does not relieve management of its
responsibilities

3 (d) All of the above

4 (b) Obtain sufficient and appropriate audit evidence of existence of fraud

5(a) Adjust the amount as aggregate of misstatement shall be taken

6 (d) obtain an understanding of management’s reasons

7 (c) II,I,IV,III

8 (d) All of the above

9 (b) Systematic sampling

10 (c) Written representations

11 (d) Both a and b

12 (a) SA 600

13 (a) Work of the expert with his name

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14 (c) Engagements

15 (d) All of the above

16 (d) He can be appointed as the auditor in all of them.

17 (a) Clause x

18 (b) Disciplinary Committee.

19 (b) Due Diligence

20 (b) Once in 4 years

21 (a) Whether half yearly return on Prudential Norms as per RBI direction furnished

22 (c) Regularity and Propriety Audit

23 (b) 3CB

24 (b) 90

25 (d) Processing and Storage of data

Ans-2 (a) Contravening Provisions of the Act: A member of the Institute, whether in practice
or not, shall be deemed to be guilty of professional misconduct under Clause (1) of Part II of
the Second Schedule to the Chartered Accountants Act, 1949, if he contravenes any of the
provisions of this Act or the regulations made there under or any guidelines issued by the
Council.

In the given case, CA. X has failed to make the payments of stipend to articled assistant every
month in accordance with Regulation 48. The fact that the articled assistant will be

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compensated with extra sum in the form of interest on late payment is not relevant and the
plea that cycle of professional receipts from clients is seasonal is not acceptable.

Therefore, CA. X is guilty of professional misconduct under Clause (1) of Part II of the Second
Schedule to the Chartered Accountants Act, 1949 as he has contravened Regulation 48 by not
making the payment every month.

(b) Following matters will be considered in applying analytical procedures as substantive

procedures in Cole Limited

1. Suitability of using substantive analytical procedures for given assertions:

– Analytical procedures are more efficient and effective in verifying completeness assertion
that is detecting unrecorded sales. In verification of understatement of cement sales, therefore,
analytical procedures are quite useful.

– Since the internal controls are not weak, analytical procedures are appropriate

– Analytical procedures in this case are useful along with tests of details

2. Reliability of data

– External source of information might include trade journals and newspapers indicating
business trends and selling prices

– Comparability of data is possible through financial analysts reports

– Budgets will be more reliable if they are considered attainable

– Analytical procedures will include comparison of financial and non financial data. For
example, number of cement bags sold with sales revenue. Here the auditor will verify controls
over processing of units purchased and sold.

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3. Whether the expectation is sufficiently precise

– There is an expectation, that higher the sales volume, the higher should be sale revenue.
Comparison of gross margins will also be useful.

– The more the information is disaggregated, the great reliance can be placed on analytical
procedures. If separate data is available for sales and cost of sales of cement, marble
and timber, analytical procedures will be more reliable.

(c) Making Roving Inquiries: Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be
guilty of misconduct if he solicits clients or professional work either directly or indirectly by a
circular, advertisement, personal communication or interview or by any other means. Such a
restraint has been put so that the members maintain their independence of judgement and
may be able to command respect from their prospective clients.

In case of making an application for the empanelment for the allotment of audit and other
professional work, the Council has opined that, “where the existence of such a panel is within
the knowledge of the member, he is free to write to the concerned organization with a
request to place his name on the panel. However, it would not be proper for the member to
make roving inquiries by applying to any such organization for having his name included in
any such panel.”

Accordingly, CA. Firm M/s GST & Associates and its partners are guilty of misconduct under
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 as it has
solicited professional work from the Goods and Service Tax Council, by inquiring about the
maintenance of the panel and advertising about 2 partners in the firm having specialized
knowledge of GST Law.

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(d) Although the auditor . ordinarily uses .same procedures in obtaining understanding of the
design and implementation of controls and procedures for tests of operating effectiveness of
controls, (except that re performance is not a procedure for obtaining understanding) the
objectives are different. The objective of tests of control is to evaluate whether a control
operated effectively.

Tests of operating effectiveness involves testing the controls throughout the period.

Tests of operating effectiveness requires a large sample size. The more the auditor intends to
place reliance on tests of controls, the greater is the extent of test of controls.

Suggest significant control procedures over cash receipts

1. The post should be opened in the presence of responsible official.

2. At least two persons should be present at the time of opining the mail
3. A date stamp should be affixed on the post indicating date of receipt
4. All cheques received should be marked “Account payee only”
5. A receipt should be given for cash receipts
6. Cash and copy of the receipts should be handed over to the cashier
7. CCTV should be installed at the point of receipt of cash

Ans-3 (a) Disclosures and Adjustments to be incorporated in the Financial Statements

included in the Offer Document:

(i) All significant accounting policies and standards followed in the preparation of
financial statements shall be disclosed.

(ii) Statement of assets and liabilities and profit and loss or any other financial shall be
incorporated after making the following adjustments wherever quantification is possible.

(iii) Adjustments for all incorrect accounting practices or failure to make provisions
or other adjustments, which resulted in audit qualification.

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(iv) As per ICDR Regulations, material amounts relating to adjustments for previous
years should be adjusted in arriving at the profits for the years to which they relate
irrespective of the year in which event triggering the profit or loss has occurred.

(v) Where there has been a change in accounting policy, the profits or losses of the
earlier years (required to be shown in the prospectus) and of the year in which the change in
accounting policy has taken place should be recomputed to reflect the profits or losses of
those years that would have been if a uniform accounting policy was followed in each of these
years.

(vi) Statement of profit or loss should disclose the profit or loss arrived at before
and after considering the profit or loss from extraordinary items.

(vii) The statement of assets and liabilities should be prepared after deducting the
balance outstanding on revaluation reserve account both from fixed assets and reserves and
the net-worth arrived at after such deductions.

(b)(a) Certain conditions are required to be met before an auditor can decide to use negative
conformation as a sole substantive procedure, these conditions include:

(i) The auditor has assessed the risk of material misstatement as low and has obtained sufficient
appropriate audit evidence regarding the operating effectiveness of controls relevant to the
assertions;
(ii) The population of items subject to negative confirmation procedure comprises a large
number of small, homogeneous account balances transactions or conditions;

(iii) A very low exception rate is expected;

(iv) The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests. In the given situation, condition # (i)

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and (ii), are met; the fact that risk of material misstatement is low suggests that condition # (iii)
is also being met. Therefore it would be appropriate to use negative conformation provided
that the fourth condition is met. For 15 major debtors, it would be appropriate to use
positive confirmation as their population consists of small number of large balances.

(b) Audit Procedures:

(i) Prepare or obtain a client roll forward schedule from 31 August 2011, to 31 October 2011.
(ii) Agree individual entries for 31 October 2011, with the sales ledger and debtors control
accounts.

(iii) Note and obtain explanation for any unusual journal adjustments.

(iv) Vouch material sales or receipts with supporting documents.

(v) Select a sample of receipts and sales and perform tests of controls to ensure that system of
internal controls continued to operate effectively.

(vi) Re-perform cutoff test at year end.

(vii) Perform analytical procedures by comparing the balances of debtors on 31 August 2011, to
Debtors on 31 October 2011, and ascertain reasons for major variances, if any.

viii) Check subsequent recovery of year end balances.

(c) If management refuses to allow the auditor to send a conformation request, the auditor shall:
(i) Inquire as to management’s reason for the refusal, and seek audit evidence as to their validity and
reasonableness;
(ii) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures;
(iii) Perform alternative audit procedures designed to obtain relevant
and reliable audit evidence.

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 (iv) If the auditor concludes that:
• Management’s refusal to allow the auditor to send a confirmation request is unreasonable;
• The auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures
the auditor shall communicate with those charged with governance and the auditor shall also
determine the implications of the results of procedures carried out above on the audit and the
auditor’s opinion

(c)Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act,
2013, read with Rule 13 of Companies (Audit and Auditors) Rules, 2014 every private company
shall be required to appoint an internal auditor or a firm of internal auditors, having -turnover
of two hundred crore rupees or more during the preceding financial year; or outstanding
loans or borrowings from banks or public financial institutions exceeding one hundred crore
rupees or more at any point of time during the preceding financial year:

In the instant case, JKH Pvt. Ltd. is having turnover of Rs 260 crores during the preceding
financial year which is more than two hundred crore rupees. Hence, the company has the
statutory liability to appoint an Internal Auditor and mandatorily conduct internal audit.

Ans-4 (a)Access to working papers:

(i) As per SA 230, “Audit Documentation” working papers are the property of the auditor.
The auditor may, at his discretion, make portion of or extracts of his working papers available to
his client.

(ii) SA 600 “Using the Work of Another Auditors” also states that an auditor should respect
the confidentiality of information acquired during the course of his audit work and should not
disclose such information unless there is a legal or professional duty to disclose.

(iii) As per ICAI Guidelines, statutory auditor of an enterprise do not have right of access to
the audit working papers of the branch auditor. An auditor can rely on the work of another

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auditor, without having any right of access to the audit working papers of other auditor.

Conclusion: Statutory auditor of Holding company cannot have access to audit working papers
of the subsidiary company’s auditor. He can however, asks the auditor to answer certain
questions about the manner in which the audit is conducted and certain other clarifications
regarding audit

(b) A due diligence audit on behalf of XYZ Pvt. Ltd. with a view to acquiring the business
shall involve following steps:

1. Brief history of the target and background of its promoters - The accountant should
begin the financial due diligence review by looking into the history of the company and
the background of the promoters. The details of how the company was set up and who
were the original promoters have to be gone into, before verification of financial data in
detail. An eye into the history of the target may reveal its turning points, survival
strategies adopted by the target from time to time, the market share enjoyed by the
target and changes therein, product life cycle and adequacy of resources. It could also
help the accountant in determining whether, in the past, any regulatory requirements
have had an impact on the business of the target. Broadly, the accountant should make
relevant enquiries about the history of target's business products, markets, suppliers,
expenses, operations

2. Accounting policies - The accountant should study the accounting policies being
followed by the target and ascertain whether any accounting policy is inappropriate. The
accountant should also see the effects of the recent changes in the accounting policies.
The target might have changed its accounting policies in the recent past keeping in view
its intention of offering itself for sale. The overall scope has to be based on the
accounting policies adopted by the management. The accountant has to look at the
main effect of accounting policies on the overall profitability and their correctness. It is

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 reiterated that the accountant should mainly look at all material changes in Accounting
Policies in the period subjected to review very carefully.

3. The accountant's report should include a summary of significant accounting policies

used by the target, that changes that have been made to the accounting policies in the
recent past, the areas in which accounting policies followed by the target are different
from those adopted by the acquiring enterprise, the effect of such differences.

4. Review of Financial Statements - Before commencing the review of each of the aspect
covered by the financial statements, the accountant should examine whether the
financial statements of the target have been prepared in accordance with the Statute
governing the target, Framework for Preparation and Presentation of the Financial
Statements and the relevant Accounting Standards. If not the accountant should record
the deviations from the above and consider whether it warrant an inclusion in the final
report on due diligence.

5. After having an overall view of the financial statements, as mentioned in the above
paragraphs, the accountant should review the operating results of the target in great
detail. It is important to make an evaluation of the profit reported by the target. The
reason being the price of the target would be largely based upon its operating results. The
accountant should consider the presence of an extraordinary item of income or expense
that might have affected the operating results of the target. It is advisable to compare the
actual figures with the budgeted figures for the period under review and those of the
previous accounting period.

6. Taxation - Tax due diligence is a separate due diligence exercise but since it is an integral
component of the financial status of a company, it is generally included in the financial
due diligence. It is important to check if the company is regular in paying various taxes to
the Government. Generally taxes are levied both by the Central Government as well as
by the State Government. Further taxes may be direct or indirect. Most of the tax laws
require the enterprise to register itself with the government and it is important to check

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 if all necessary registrations have been made. The accountant has to also look at the tax
effects of the merger or acquisition.

7. Cash Flow - A review of historical cash flows and their pattern would reflect the cash
generating abilities of the target company and should highlight the major trends. It is
important to know if the company is able to meet its cash requirements through internal
accruals or does it have to seek external help from time to time. It is necessary to check if
a) Is the company able to honour its commitments to its trade payables, to the banks, to
government and other stakeholders b) How well is the company able to turn its trade
receivables and inventories c) How well does it deploy its funds d) Are there any funds
lying idle or is the company able to reap maximum benefits out of the available funds?

8. Financial Projections - The accountant should obtain from the target company the
projections for the next five years with detailed assumptions and workings. He should
ask to give projections on optimistic, pessimistic and most likely bases.

9. Ordinarily, it would be desirable that the accountant evaluates the appropriateness of

assumption used in the preparation and presentation of financial projections. If, the
accountant is of the opinion that as assumption used by the target is unrealistic, the

10. Accountant should consider its impact on the overall valuation of the company. He should
offer his comments on all the assumption, highlighting those which, in his opinion are not
inappropriate. In case he feels the projections provided by the target are not achievable
or aggressive he has to mention this in his report. He should thoroughly check the
arithmetic of the calculations made for financial projections.

11. Management and Employees - In the Indian context, the status of work force, staff and
employees and their demands is a complex problem. In most of the companies which
are available for take over the problem of excess work force is often witnessed. It is
important to work out how much of the labour force has to be retained. It is also
important to judge the job profile of the administrative and managerial staff to gauge

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 which of these match the requirements of the new incumbents. Due to complex set of
labour laws applicable to them, companies often have to face protracted litigation from
its workforce and it is important to gauge the likely impact of such litigation.

12. It is important to see if all employee benefits like Provident Fund (P.F.), Employees State
Insurance (E.S.I), Gratuity, leave and Superannuation have been properly paid/ provided
for/funded. In case of un-funded Gratuity, an actuarial valuation of the liability has to be
obtained from a reputed actuary. The assumptions regarding increase in salaries,
interest rate, retirement etc. have to be gone into to see if they are reasonable. It is also
necessary to see if the basic salary /wage considered for the valuation is correct and
includes all elements subject to payment of Gratuity. In the case of PF, ESI etc. the
accountant has to see if all eligible employees have been covered.

13. It is very important to consider the pay packages of the key employees as this can be a
crucial factor in future costs. One has to carefully look at Employees Stock Option Plans;
deferred compensation plans; Economic Value Addition and other performance linked
pay; sales incentives that have been promised etc. It is also important to identify the key
employees who will not continue after the acquisition either because they are not
willing to continue or because they are to be transferred to another company within the
'group' of the target company.

14. Statutory Compliance - During a due diligence this is one aspect that has to be
investigated in detail. It is important therefore, to make a list of laws that are applicable
to the entity as well as to make a checklist of compliance required from the company
under those laws. If the company has not been regular in its legal compliance it could
lead to punitive charges under the law. These may have to be quantified and factored
into the financial results of the company.

In addition to the above steps, the following further points have to be seen:
(i) Reason for sale of business and the effect on turnover and profits due to the exist of the
present proprietor.

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(ii) The length of the lease under which business has been operating.

(iii) The unexpired period of patents if any held by the vendors.

(iv) The age of managerial staff and prospects of their continuing in service in the new
environment; the effect of trained managerial staff learning the organisation in
production/sales/administrative and the financial liability to pay terminal benefits/
compensation, etc.

(v) If bulk sales are to a few limited customers, the profitability should be discounted greatly,
because any substantial withdrawal of customers might cause business crashes.

(vi) A company with a sound financial structure can better withstand the stresses and strains
of business. A low debt-equity ratio would indicate an ability to grow through debt
financing without raising equity.

(vii) The cash generated from operations; the need for redeployment of resources
and funds needed for repayment of loans become major factors in determining growth
potential.

(viii) The valuation of goodwill if any should be on reasonable basis having regards to
all factors mentioned above.

(c) Uncorrected Misstatements identified during the Audit: In accordance with SA 450
“Evaluation of Misstatements identified during the Audit”, the auditor shall determine
whether uncorrected misstatements are material, individually or in aggregate. In making this
determination, the auditor shall consider-

(i) The size and nature of the misstatements, both in relation to particular classes of
transactions, account balances or disclosures and the financial statements as a whole,
and the particular circumstances of their occurrence; and

(ii) The effect of uncorrected misstatements related to prior periods on the relevant

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 classes of transactions, account balances or disclosures, and the financial statements
as a whole.

The auditor shall communicate this with those charged with governance uncorrected
misstatements and the effect that they, individually or in aggregate, may have on the opinion
in the auditor’s report, unless prohibited by law or regulation.

The auditor’s communication shall identify material uncorrected misstatements individually.

The auditor shall request that uncorrected misstatements be corrected.

Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess
materiality determined in accordance with SA 320, to confirm whether it remains appropriate
in the context of the entity’s actual financial results.

As per management, if effect of such uncorrected misstatement is immaterial then the

auditor shall request for a written representation from management and, where appropriate,
those charged with governance that whether they believe the effects of uncorrected
misstatements are immaterial, individually and in aggregate, to the financial statements as a
whole. A summary of such items shall be included in or attached to the written
representation.

If the management refuses to adjust the financial information and the results of extended
audit procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should report accordingly.

ANS-5 (a) Role of Auditor in case of Parent Company and Subsidiary Company: As per SA 600
“Using the Work of Another Auditor”, there should be sufficient liaison between the principal
auditor (hereinafter referred as auditor of Parent Company and the other auditor (hereinafter
referred as auditor of Subsidiary Company). Role of Principal Auditor (ABC & Associates-
Auditor of Parent Company):

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(i) It is necessary to issue written communication(s) as a principal auditor to the other auditor.

(ii) The principal auditor should advise the other auditor of any matters that come to his
attention that he thinks may have an important bearing on the other auditor’s work. (iii) When
considered necessary by him, the principal auditor may require the other auditor to answer a
detailed questionnaire regarding matters on which the principal auditor requires information
for discharging his duties.

Role of Other Auditor (XYZ & Associates- Auditor of Subsidiary Company):

(i) The other auditor, knowing the context in which his work is to be used by the principal
auditor, should co-ordinate with the principal auditor. For example, by bringing to the principal
auditor’s immediate attention any significant findings requiring to be dealt with at entity level,
adhering to the time-table for audit of the component, etc.

(ii)He should ensure compliance with the relevant statutory requirements.

(iii) The other auditor should respond to the questionnaire on a timely basis sent by Principal
Auditor.

(b) Special Audit Report: A lending bank may, in special cases, require the non-corporate entity
to obtain a special report from the auditor. Such a report can be called by a lending bank if it
finds that it is necessary to have more information about the working of the entity. In such a
case the report will have to be given by the auditor on a quarterly basis. The special audit
report which is to be given on a quarterly basis in the specified form is in addition to the normal
audit report which is to be given by the auditor on a yearly basis.

Special Report in respect of Operating Data: In the quarterly special audit report, the auditor
will have to give information relating to the operating data for each quarter. This information
will have to be classified in the following manner:

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 (i) Actual production;
(ii) Actual production as a percentage of rated capacity;
(iii) Sales;
(iv) Cost of goods sold/cost of production;
(v) Gross margin;
(vi) Interest on bank borrowing; and
(vii) Interest on others

Special Report in respect of Inventory: The age-wise classification of raw materials and finished
goods is to be given. For this purpose age-wise classification is to be made in the following
manner in respect of raw materials and finished goods separately;

(i) Inventory for more than one year;

(ii) Between 6 months and one year;
(iii) Between three months and 6 months; and
(iv) Below 3 months.

Similar information about the work-in-progress i.e. the number of days of production which
remains in progress should also be given. The basis of valuation of raw material and finished
goods should be given. For this purpose, the following information is to be given:

i) The manner of determination of cost (i.e. components of cost)

ii) The method of valuing stock i.e. FIFO, weighted average cost, etc

It is also necessary to state if there is any discrepancy between the quantity and value of the
stock as furnished to the bank and as appearing in the books. The reasons for such discrepancy
should be given in the audit report.

Special Report in respect of Other Items: Age-wise classification of bills receivable and other

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receivables with reference to the, bills due from domestic parties and bills in respect of exports
should be given. The age-wise classification is to be done on the same basis as the classification
for raw materials and finished goods as stated above.

Information in respect of the following items is also to be given:

(i) Balances at the end of each month of the quarter for major categories of stock, receivables
and bills receivables;

(ii)Tax assessments and payments made during the quarter;

(iii) Actual disbursement of capital expenditure during the quarter;

(iv) Outstanding contracts on capital account at the end of the quarter giving the details about
the names of parties and amounts outstanding;

(v)The contingent liability which may or may not materialize during the financial year
succeeding the relevant quarter;

(vi) Investment made during the quarter and the income from such investments including profit
on sale of investments;

(vii) Loans given during the quarter;

(viii) Loans raised during the quarter from banks and from others. Separate figures to be given;

(ix) Overdue statutory liability at the end of the quarter;

(x)Amounts due but not paid at the end of the quarter in respect of (a) loans from banks, (b)
public deposits, and (c) other loans; and

(xi) Figures of cash losses during the last 2 years to be stated on the basis of the annual
accounts. If such accounts were not audited this fact should be stated.

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The funds obtained from the lending banks have to be utilized for the purpose for which they
are given by the bank. If the auditor finds that these funds have been diverted for the purposes
other than those for which they were given by the bank the auditor will have to give the details
of the diversion for such other purposes. In order that the lending bank may be able to
ascertain the correct financial position and financial health of the entity it is necessary for the
auditor to give the details of the diversion for such other purposes. In order that the lending
bank may be able to ascertain the correct financial position and financial health of the entity it
is necessary for the auditor to give information about the following ratios:

(a) Current ratio

(b) Acid test ratio

(c)Raw materials-turnover ratio

(d) Finished goods-turnover ratio

(e) Receivables-turnover ratio

(f) Return on investment

(g) Interest cover ratio

(h) Net margin ratio

(i) Capital turnover ratio

(j) Debt equity ratio

(k)Operating cash flow.

(c) Scope and extent of investigation - When a chartered accountant is appointed to carry out
an investigation, the extent of enquiry, the objective of the investigation and the various

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matters referred to for investigation are specified in the order of investigation issued by the
appointing authority. On a consideration thereof, the investigating accountant should
determine the areas of accounts which require investigation and the extent to which the
enquiry is to be made as well as his general approach to the enquiry. For example, if the
allegation is that certain transactions have been entered into in contravention of the
provisions of the Companies Act, the nature of transactions, the persons who were parties
thereto, the amount or amounts involved and the circumstances under which these were
entered into must be examined. If the loss suffered by the company has given rise to a gain
by a director and other managerial personnel or its associates, the manner in which the
benefit has accrued and the amount thereof shall have to be investigated.

In case of a company having subsidiaries or where one or more directors are interested in one
or more concerns, all the dealings with these concerns should be examined for these may have
been entered into with the intention of transferring profit. Generally, all sales and purchases of
goods and assets from directors and their associated concerns should be scrutinised since these
also can be a vehicle of illicit transferring of profits.

Any breach of duty or abdication of responsibility for purposes of investigation would be

material only if it has resulted in a loss to the company. In such a case, the factors responsible
for the loss or losses, besides the amount thereof, shall have to be investigated. Negligence
would be culpable only if it was in relation to a duty cast by the Act, Articles of Association or
by a resolution of the shareholders or that of the Board of Directors.

Any negligence in the discharge of duty of a director or any other managerial personnel must
be construed very broadly, for apart from being the agents of the company, they are trustees of
its property.

It may be necessary for an investigator to interrogate directors, officers, agents, and others
concerned with matters under his enquiry. Before drawing up his brief in this regard as well as
for framing his conclusions, he should, if necessary, take legal assistance. If the Investigating
accountant is required to report on the efficiency of the management, he should be discreet in

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expressing his opinion. Usually, it is sufficient if he merely indicates the general limitations of
the management. The inspector must ensure that the persons who figure in the investigation
get the fullest opportunity to explain their action and conduct.

Ans- 6 (a) Other Misconduct:

(i) As per Part IV of First Schedule of the CA Act, a member of the Institute whether in practice
or not, shall be deemed to be guilty of other misconduct if he-

1. Is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months.

2. In the opinion of the Council, brings disrepute to the profession or the Institute as a
result of his action, whether or not related to his professional work.

(ii) As per Part III of Second Schedule to the CA Act, a member of the Institute whether in
practice or not shall be deemed to be guilty of other misconduct if he Is held guilty by any civil
or criminal court for an offence which is punishable with imprisonment for a term exceeding
six months.

This provision empowers the Council to enquire any misconduct of a member even if it does
not arise of professional misconduct.

Some illustrative examples, where a member may be found guilty of “Other Misconduct”,
under the aforesaid provisions rendering, himself unfit to be member are:

(iii)Where a chartered accountant retains the books of account and documents of the client
and fails to return these to the client on request without a reasonable cause.

(iv) Where a chartered accountant makes a material misrepresentation.

(v) Where a chartered accountant uses the services of his articled or audit clerk for purposes

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other than professional practice

(vi) Conviction by a competent court of law for any offence under Section 8(v) of the
Chartered Accountants Act 1949.

(vii) Misappropriation by office-bearer of a Regional Council of the Institute, of a large

amount and utilization thereof for his personal use.

(viii) Non-replying within a reasonable time and without a good cause to the letter of the
public authorities.

(ix) Where certain assessment records of income tax department belonging to the client of
Chartered Accountant were found in the almirah of the bed-room of the chartered
accountant.

(ix) Where a chartered accountant had adopted coercive methods on a bank for having a loan
sanctioned to him.

(b) (a) If the auditor believes that the entity is not a going concern, the auditor should ask the
management to prepare financial statements at breakup value basis.

Assets should be valued at recoverable amount, current and noncurrent classification is not to
be made and additional liabilities arising from liquidation should be recognized.

(b) Proper application of alternative approach is to be considered by

the auditors. If the accounting treatment and disclosures are appropriate, an unqualified
opinion may be given.

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 (c) In our opinion, because of the matters discussed in the preceding, the financial statements
do not give as true and fair view of the financial position of Gora Private Limited as of
December 31, 2008, and of its financial performance and its cash flows for the year then ended,
in accordance with International Financial Reporting Standards.

(c) Accepting Appointment as an Auditor: As per Chapter 7 of Council General Guidelines

2008, a member of the Institute of Chartered Accountants of India in practice shall be deemed
to be guilty of professional misconduct if he accepts appointment as auditor of an entity in
case the undisputed audit fee of another chartered accountant for carrying out the statutory
audit under Companies Act or various other statutes has not been paid.

As per the proviso, such prohibition shall not apply in case of a sick unit where a sick unit is
defined to mean “where the net worth is negative”.

In the instant case, though the undisputed fees are unpaid, Mr. Z would still not be guilty of
professional misconduct since the M/s NCT Limited. is a sick unit having negative net worth
for the year 2013-14.

(d) Fundamental Principles as per Code of Ethics: In order to achieve the objectives of the
Accountancy profession, professional accountants have to observe a number of
prerequisites or fundamental principles. The fundamental principles as discussed in Code of
Ethics of ICAI, to be complied, are given below:

a) Integrity

b) Objectivity

c) Professional Competence and Due Care

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 d) Confidentiality

e) Professional Behaviour

Threats involved while Complying with Fundamental Principles:

 Integrity - To maintain honesty and integrity in professional relationship would be a

threat for the professional accountant.

 Objectivity - A professional accountant should not allow bias, conflict of interest or

undue influence of others to override professional judgments for example
intimidation threat.

 Professional Competence and Due Care - A professional accountant has a continuing

duty to maintain professional knowledge based on current developments, and should
act in accordance with applicable technical and professional standards while providing
professional services.

 Confidentiality - A professional accountant should respect the confidentiality of

information acquired as a result of professional and employment relationships. The

 acquired information should not be disclosed to third parties without specific

authority unless there is a legal or professional duty to disclose, and should also not be
used for personal advantage of any person.

 Professional Behaviour - A professional accountant should comply with relevant laws

and regulations and should avoid any action that discredits the profession.

Ans-7 (a) Fraud Committed by an Employee of the Company: As per Section 143(12) of the
Companies Act, 2013, if an auditor of a company, in the course of the performance of his
duties as statutory auditor, has reason to believe that an offence involving fraud is being or

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has been committed against the company by officers or employees of the company, he shall
immediately report the matter to the audit committee (in case amount involved in is less than
Rs1 crore) within 2 days of his knowledge and he shall report the matter specifying the Nature
of Fraud with description, Approximate amount involved; and Parties involved.

Further, if the offence of fraud, which involves or is expected to involve individually an amount
of Rs 1 crore or above, the auditor shall report the matter to the Central Government.

The manner of reporting the matter to the Central Government is as follows:

(i) the auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than 2 days of his knowledge of the fraud, seeking
their reply or observations within 45 days;

(ii) on receipt of such reply or observations, the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his comments (on
such reply or observations of the Board or the Audit Committee) to the Central
Government within 15 days from the date of receipt of such reply or observations;

(iii) in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which he has not received
any reply or observations;

(iv) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover
by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail
in confirmation of the same;

(v) the report shall be on the letter-head of the auditor containing postal address, e-mail
address and contact telephone number or mobile number and be signed by the auditor
with his seal and shall indicate his Membership Number; and

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 (vi) the report shall be in the form of a statement as specified in Form ADT-4.

(b) Indebtness to the Company: As per section 141(3)(d)(ii) of the Companies Act, 2013, a
person who is indebted to the company for an amount exceeding Rs 5,00,000 shall be
disqualified to act as an auditor of such company and further under section 141(4) he shall
vacate his office of auditor when he incurs this disqualification subsequent to his
appointment.

However, where the person has liquidated his debt before the appointment date, there is no
disqualification to be construed for such appointment.

In the given case, CA Adroit was indebted to Infructuous (P) Ltd. for a sum of
Rs 6,00,000 as on 01.04.2015. He was appointed as an auditor of the company for the year
ended 31.03.2016 at the Annual General Meeting held on 16.07.2015. He also repaid the loan
amount fully to the company on 10.7.2015 i.e. before the date of his appointment.

Hence, the appointment of CA Adroit as an auditor is valid and the shareholder’s complaint is
not acceptable

(c) Circumstances which require an Adverse or Qualified Statement - Depending upon the
facts and circumstances, some situations may require an adverse or qualified statement or a
disclosure without necessarily making it a subject matter of qualification in the Auditors’
Certificate, in respect of compliance of requirements of Corporate Governance for e.g.,

(i) The number of non-executive directors is less than 50% of the strength of Board of
directors.

(ii) A qualified and independent audit committee is not set up.

(iii) The chairman of the audit committee is not an independent director.

(iv) The audit committee does not meet four times a year.

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 (v) The necessary powers in terms of Clause 49 III (D) of the Listing Agreement have not
been vested by the Board in the audit committee.

(vi) The time gap between two Board meetings is more than one hundred and twenty days.

(vii) A director is a member of more than ten committees or act as Chairman of more
than five committees across all companies in which he is a director.
(viii) The information of quarterly results is neither put on the company’s website nor
sent in a form so as to enable the Stock Exchange on which the entity’s securities are
listed to enable such Stock Exchange to put it on its own website.

(ix) The power of share transfer is not delegated to an officer or a committee or to the
registrar and share transfer agents.

(d) A request from the client for the auditor to change the engagement may result from a
change in circumstances affecting the need for the service, a misunderstanding as to the nature
of an audit or related services originally requested or a restriction on the scope of the
engagement, whether imposed by the management or caused by the circumstances.

A change in circumstances that affects the entity’s requirements or misunderstanding

concerning nature of service originally requested would ordinarily be considered as reasonable
basis for requesting a change in the engagement. However, a change would not be
considered reasonable if it appeared that the change relates to information that is incorrect,
incomplete or otherwise unsatisfactory.

The auditor should also consider legal or contractual implications of the change. In view of
above, it would not be appropriate to accept the change in the assignment as the reason for
change seems to be lack of availability of audit evidences

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