Audit - Independent MCQs & Integrated Case Study

Question 1

Which among the following are the skills to be possessed by M/s ABC & Associates as forensic auditors?

a. Criminology & Evidence gathering
b. Confidence & Curiosity
c. Discretion & Creativity
d. Inquisitiveness & Persistence

Answer 1

a. Criminology & Evidence gathering

Question 2

Which of the following is an example of Direct Entity Level Control –

a. Company code of conduct and ethics policies
b. Human resource policies
c. Job roles & responsibilities of employees
d. Monitoring of effectiveness of control activities by Internal Audit function

Answer 2

d. Monitoring of effectiveness of control activities by Internal Audit function

Question 3

M/s ASH Brothers is a partnership firm engaged in the business of selling old vehicles. Mr. A, Mr. S & Mr. H are the 3 partners of the firm.

In the month of January 2021, Mr. H’s son (a minor) was admitted for the benefit of partnership who attained majority in April 2022, but no change was made in the Partner’s share during the year.

Whether the tax auditor is required to mention the details of Mr. H’s son admitted to the partnership during the year, as per Clause 9 of Form 3CD of the Income Tax?

a. Since the minor has not attained majority during the audit period, no details need to mention in Form 3CD.

b. The auditor is not required to give details of minor admitted to partnership as there was no change in the Partner’s Share during the year.

c. Any change in the Partners since the last date of the preceding year has to be mentioned under Clause 9(b) of Form 3CD.

d. As the father of minor is his guardian till, he attains majority and Mr. H was already partner in the firm, there is no need to mention the details of minor in Form 3CD.

Answer 3

c. Any change in the Partners since the last date of the preceding year has to be mentioned under Clause 9(b) of Form 3CD

Question 4

ABC Private Limited uses in-house developed application system for Accounting. The auditor observed that user ID and password is mandatory to access the application system and felt that this is a good control. What type of control is this?

a. IT General Control.
b. Application Control.
c. Detective Control.
d. Preventive Control.

Answer 4

d. Preventive Control.

Question 5

XYZ Private Ltd uses ERP software for all business processes. The application is hosted in cloud and is maintained by a third party. Statutory Auditor is not confident about the risk management process in the third-party organization and requests for audit access to such data center. The request was declined and management informed that the third party is ISO certified and audit on controls at Service Organization is regularly being conducted. What the auditor should do?

a. Do not ask for anything else since the Third Party is ISO certified.
b. Insist on conducting audit in the Third Party.
c. Take ISO certificate.
d. Take the Service Organization control audit report to review.

Answer 5

d. Take the Service Organization control audit report to review.

Question 6

As per SA 550 on Related Parties, existence of which relationship indicate the presence of control or significant influence?

a. Friend of a family member of a person who has the authority and responsibility for planning.
b. Holding debentures in the entity.
c. The entity’s holding of debentures in other entities.
d. The entity’s holding of equity in other entities.

Answer 6

d. The entity’s holding of equity in other entities.

Question 7

As per the Quality Review Board, the term “technical standards” in the context of CA Rules, 2006 includes which among the following?

a. ICDS notified under Income Tax Act, 1961

b. AS notified under Companies Act, 2013

c. Guidance Notes on accounting & auditing matters issued by C&AG

d. Notifications/ Directions issued on accounting & auditing matters issued by RBI/ SEBI/ other regulatory bodies

Answer 7

b. AS notified under Companies Act, 2013

Question 8

M Ltd is a company engaged in the manufacture of iron & steel bars. VP & Associates are the statutory auditors of M Ltd for the FY 2021-22.

During the course of audit, CA V, the engagement partner, found that the Company’s financing arrangements have expired, and the amount outstanding was payable on March 31, 2022. The company has been unable to re-negotiate or obtain replacement financing & is considering filing for bankruptcy.

These events indicate a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern & therefore it may be unable to realize its assets & discharge its liabilities in the normal course of business.

The FS (and notes thereto) do not disclose this fact. What opinion should CA V express in the case of M Ltd?

a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

Answer 8

c. Adverse opinion

Question 9

The basic assumption underlying the use of analytical procedures is:

a. It helps the auditor to study relationship among elements of financial information.

b. Relationship among data exist and continue in the absence of known condition to the contrary.

c. Analytical procedures will not be able to detect unusual relationships.

d. None of the above.

Answer 9

b. Relationship among data exist and continue in the absence of known condition to the contrary.

Question 10

If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances that bring into question his ability to continue performing the audit, he shall –

a. Withdraw from the engagement immediately.
b. Report to Audit team regarding withdrawal.
c. Determine the professional and legal responsibilities applicable in the circumstances.
d. Ask the management for his withdrawal.

Answer 10

c. Determine the professional and legal responsibilities applicable in the circumstances.

Question 11

Direct confirmation procedures are performed during audit of accounts receivable balances to address the following BS assertion –

a. Right & obligations
b. Valuation
c. Completeness
d. Existence

Answer 11

d. Existence

Question 12

The Auditor shall express _____ opinion when the auditor, having obtained SAAE, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the FS.

a. Adverse
b. Qualified
c. Disclaimer of Opinion
d. Clean

Answer 12

a. Adverse

Question 13

When does an auditor shall modify the opinion in the auditor’s report?

a. When, based on the audit evidence obtained, the FS as a whole are not free from material misstatement

b. When, unable to obtain SAAE to conclude that the FS as a whole are free from material misstatement.

c. (a) and (b) both.

d. Either (a) or (b).

Answer 13

c. (a) and (b) both.

Question 14

The agreed terms of the audit engagement shall be recorded in an audit engagement letter which shall include the following except –

a. Responsibilities of the Auditor
b. Description of methods to be followed for obtaining audit evidence
c. Responsibilities of Management
d. Objective and scope of the audit of the FS

Answer 14

b. Description of methods to be followed for obtaining audit evidence

Question 15

The measure of the quality of audit evidence about its relevance and reliability in providing support for the conclusions on which the auditor’s opinion is based is –

a. Sufficiency of audit evidence
b. Appropriateness of audit evidence
c. Accounting estimates
d. Reasonableness of audit evidence

Answer 15

b. Appropriateness of audit evidence

Question 16

For a given level of audit risk, the acceptable level of detection risk bears _____ relationship to the assessed risks of material misstatement at the assertion level. (DR & ROMM).

a. Direct
b. Inverse
c. Either (a) or (b)
d. None of the above

Answer 16

b. Inverse

Question 17

Control activities, whether within IT or manual systems, have various objectives and are applied at various organizational and functional levels.

Which of the following is an example of control activities?

a. Authorization
b. Performance reviews
c. Information processing
d. All of the above

Answer 17

d. All of the above

Question 18

In order to form the opinion, the auditor shall conclude as to whether the auditor has obtained ____ about whether the FS as a whole are free from material misstatement, whether due to fraud or error.

a. Reasonable assurance
b. Absolute assurance
c. Limited assurance
d. None of the above

Answer 18

a. Reasonable assurance

Question 19

Which of the following information should a successor auditor obtain during the inquiry of the predecessor auditor before accepting engagement?

i. Information about integrity of management
ii. Disagreement with management concerning auditing procedures
iii. Review of internal control system
iv. Organization structure

a. (i) and (ii)
b. (ii) and (iii)
c. (i), (ii) and (iii)
d. (i) and (iii)

Answer 19

a. (i) and (ii)

Question 20

In an investigation relating to possible misappropriation of cash, the cashier says that every day the cash is counted and is reviewed by the Finance Head. Your specimen review indicates that the daily cash summary was not signed off by of the Finance Head. In this situation, you should:

a. Conclude that the cashier is not telling truth

b. Consider extending investigation procedures like corroborative enquiry with the Finance Head, review of appropriate daily cash summaries, etc.

c. Conclude that the Finance Head is not a responsible person

d. Conclude that daily cash summary is not relevant for the investigation

Answer 20

b. Consider extending investigation procedures like corroborative enquiry with the Finance Head, review of appropriate daily cash summaries, etc.

Question 21

The auditor’s ___ safeguards the auditor’s ability to form an audit opinion without being affected by any influences.

a. Objectivity
b. Independence
c. Confidentiality
d. Integrity

Answer 21

b. Independence

Question 22

Current period adjustments are those adjustments that are made:

a. Only on the first occasion of the preparation and presentation of CFS.
b. Only on the first occasion of the audit of CFS.
c. In the accounting period for which the Consolidation of FS is done.
d. None of the above.

Answer 22

c. In the accounting period for which the Consolidation of FS is done.

Question 23

_____ approach to sampling has the following characteristics:

 Random selection of the sample items; and
 The use of probability theory to evaluate sample results, including measurement of sampling risk.

a. Statistical Sampling
b. Non-statistical Sampling
c. Stratified Sampling
d. Haphazard Sampling

Answer 23

a. Statistical Sampling

Question 24

Which of the following is not an indicator about material uncertainty over the entity’s ability to continue as a going concern:

a. Net liability or net current liability position.

b. Cancellation of company’s production license due to change on government policies.

c. Non-declaration of dividend to equity shareholders.

d. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.

Answer 24

c. Non-declaration of dividend to equity shareholders.

Question 25

OPE Ltd. issued a prospectus in respect of an IPO which had the auditor’s report on the FS for the YE 31 March 2021. The issue was fully subscribed.

During this year, there was an abnormal rise in the profits of the company for which it was found later on that it was because of manipulated sales in which there was participation of WTD and other top officials of the company.

On discovery of this fact, the company offered to refund all moneys to the subscribers of the shares and sued the auditors for the damages alleging that the auditors failed to examine and ascertain any satisfactory explanation for steep increase in the rate of profits and related accounts.

The company emphasized that the auditor should have proceeded with suspicion and should not have followed selected verification. The auditors were able to prove that they found internal controls to be satisfactory and did not find any circumstance to arouse suspicion.

The company was not able to prove that auditors were negligent in performance of their duties. Please suggest your views on this.

a. The stand of the company was correct in this case. Considering the nature of the work, the Auditors should have proceeded with suspicion and should not have followed selected verification.

b. The approach of the auditors look reasonable in this case. The auditors found internal controls to be satisfactory and also did not find any circumstance to arouse suspicion and hence they performed their procedures on the basis of selected Verification.

c. In the given case, the auditors should have involved various experts along with them to help them on their audit procedures. Prospectus is one area wherein management involves various experts and hence the auditors should also have done that. In the given case, by not involving the experts the auditors did not perform their job in a professional manner. If they had involved experts like forensic experts etc., the manipulation could have been detected. Hence the auditors should be held liable.

d. In case of such type of engagements, the focus is always on the management controls. If the controls are found to be effective then an auditor can never be held liable in respect of any deficiency or misstatement or fraud.

Answer 25

b. The approach of the auditors look reasonable in this case. The auditors found internal controls to be satisfactory and also did not find any circumstance to arouse suspicion and hence they performed their procedures on the basis of selected Verification.

Question 26

Employees of G Ltd. have to travel frequently for business purposes, so the company entered into a contract with S Travels Ltd for managing booking, cancellation and other services required by their employees.

As per contract terms, S travels has to raise its monthly bills for the tickets booked or cancelled during the period and the same are paid by G Ltd within 15 days of the bill date.

The bills raised by S travels were of huge amount, so the management of G Ltd decided to get an audit conducted of the process followed for booking/ cancellation of tickets and verify the accuracy of bills raised by the travel agency.

Which audit do you feel the management should opt for?

a. Internal audit, as it relates to examining the operational efficiency of the organization.

b. Management audit, as it is an audit desired by the management.

c. Performance audit, so as to assess the performance of the S travels appointed by the organization.

d. Operational audit, as it is the audit for the management and involves verifying the effectiveness, efficiency and economy of operations done by the S travels for the organization.

Answer 26

d. Operational audit, as it is the audit for the management and involves verifying the effectiveness, efficiency and economy of operations done by the S travels for the organization.

Question 27

M/s S and Associates were appointed as the statutory auditors of P Limited for the audit of FY 2021-22. P Limited has a power generating plant in Sikkim. At the time of accepting the engagement, it was decided among the engagement partner (CA S) and the management that since CA S and his team is doing the audit of a client having power plant in Sikkim for the first time, it will be the duty of the management to update the audit team regarding all the taxes and statutes applicable to units situated in Sikkim. Which of the following is correct in this regard?

(a) The engagement team, being the auditor of Sikkim based power plant for the first time can always rely on the management’s information and can work accordingly.

(b) The engagement team should understand the P Limited business environment and should obtain knowledge about the laws and statutes applicable in this case.

(c) The engagement team should not accept the audit of such power plant situated in Sikkim of which he has no prior knowledge.

(d) The engagement team can very well accept the audit of P Limited and with respect to aspects related to Sikkim law he can give disclaimer of opinion, if required.

Answer 27

(b) The engagement team should understand the P Limited business environment and should obtain knowledge about the laws and statutes applicable in this case.

Question 28

M/s S have been appointed as statutory auditors of K Ltd which is the company registered u/s 8 of the Companies Act 2013. During the course of audit, CA S noticed that the BOD have held their meetings only twice, in the FY under audit. How should CA S deal with the same in the compliance certificate to be issued by him?

(a) CA S should give an adverse statement stating that the meeting of BOD were held only twice as against the minimum requirement of 4 meetings of FY.

(b) CA S need not mention regarding the same in the compliance certificate as there is no minimum requirement of meeting of BOD in case of companies registered u/s 8.

(c) K Ltd being a company registered u/s 8 of the Companies Act 2013 is exempt from obtaining compliance certificate from the statutory auditors.

(d) K Ltd is correct in conducting two meeting of BOD therefore , CA S should not give an adverse or qualified statement in this regard.

Answer 28

(d) K Ltd is correct in conducting two meeting of BOD therefore , CA S should not give an adverse or qualified statement in this regard.

Question 29

M/s V and Associates have been appointed as the statutory auditors of a NBFC ( UVW Ltd) for the FY 2021-22. The company is required to comply with the Ind AS. During the course of audit CA V found that the company has classified its Assets and Liabilities as financial and non-financial instead of current and non-current.

What should CA V advice the management of NBFC UVW Ltd. in this regard?

(a) The management of NBFC UVW Ltd is correct in classifying the BS items as financial and non-financial as per requirement of Division Ill of Schedule Ill of Companies Act 2013.

(b) The management of NBFC UVW Ltd is not correct in this regard and should classify the BS items as current and non-current as is required by all other companies as per the requirement of the Division Ill under Schedule Ill of the Companies Act 2013.

(c) The management of NBFC UVW Ltd is right in this regard as the NBFC has the option to classify the BS items either as current and non-current or as financial and non- financial.

(d) The management of NBFC UVW Ltd should classify the BS items as current and noncurrent as per the requirement of Division II of Schedule Ill of the Companies Act 2013 applicable in case of NBFC.

Answer 29

(a) The management of NBFC UVW Ltd is correct in classifying the BS items as financial and non-financial as per requirement of Division Ill of Schedule Ill of Companies Act 2013.

Question 30

M/s B and Associates have been appointed as the statutory auditor of P Limited, a manufacturer of gas geysers for the FY 2021-22.

During the course of audit, the auditor found that two customer complaints have been filed against the company in the FY 2021-22, for the use of sub-standard pipes and wires in manufacture of gas geysers. The gas geyser blasted at high temperature leading to severe injuries to the family of complainant along with damage to their property.

They have sought a demand of rupees 10 crore. However, the lawyer of P Limited believes that such claim is unsustainable as the incident occurred due to short circuit at both the complainant’s place. The management of P Limited accordingly did not include any reference to the litigation in the FS.

The auditor obtained legal advice from some independent lawyer according to whom the outcome of the case is not ascertainable as of now.

(a) The statutory auditor should give an unqualified opinion.
(b) The statutory auditor should give an unqualified opinion with EOM paragraph.
(c) The statutory auditor should withdraw from the audit engagement.
(d) The statutory auditor should give a qualified opinion.

Answer 30

(d) The statutory auditor should give a qualified opinion.

Question 31

M/s ABC & Associates are the statutory auditors of PQR Ltd for the FY 2020-21. While conducting the audit, CA A, the engagement partner noticed the following:

• Payments of various fines and penalties
• Unusual cash payments
• Payments to various government employees not supported by any document
• Notices received from various regulatory authorities.
• Heavy payments to legal counsels.

CA A should consider the above as indicative of:

a. Doubt on Internal Controls of PQR Ltd.
b. Doubt of non-compliance to laws by PQR Ltd.
c. Doubt on the accounting system of PQR Ltd.
d. Doubt on the going concern assumption of PQR Ltd.

Answer 31

b. Doubt of non-compliance to laws by PQR Ltd.

Question 32

The following inherent limitations in an audit affect the auditor’s ability to detect material misstatements except:

a. Test and sampling.
b. Audit process permeated by judgement.
c. Poor corporate governance.
d. Audit evidence.

Answer 32

c. Poor corporate governance.

Question 33

Judgements about materiality are made in the light of surrounding circumstances, and are affected by:

a. The auditor’s perception of the financial information needs of users of the FS.
b. Both the auditor’s perception of the financial information needs of users of the FS, the size or nature of a misstatement.
c. The size or nature of a misstatement.
d. The company’s control environment.

Answer 33

b. Both the auditor’s perception of the financial information needs of users of the FS, the size or nature of a misstatement.

Question 34

Professional judgement is defined as:

a. The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

b. An attitude to avoid significant mistakes which could influence the economic decisions of users taken on the basis of the FS.

c. Decision making about the requirements of the accounting profession.

d. An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Answer 34

a. The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

Question 35

Professional skepticism is defined as:

a. An attitude to avoid significant mistakes which could influence the economic decisions of users taken on the basis of the FS.

b. The application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

c. An analysis of management decisions in terms of failed outcomes.

d. An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Answer 35

d. An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Question 36

The management of M Ltd. has developed a strong internal control in its accounting system in such a way that the work of one person is reviewed by another. Since no individual employee is allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors are high.

CA. O has been appointed as an auditor of the company for current FY 2020-21. Before starting the audit, she wants to evaluate the ICS of M Ltd.

To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls, CA. O decided to use internal control questionnaire to know and assimilate the system and evaluate the same.

Which of the following questions need not be framed under internal control questionnaire relating to purchases?

a. Are authorized signatories for purchases limited to elected officials?
b. Are payments approved only on original invoices?
c. Does authorized officials thoroughly review the documents before signing cheques?
d. Are monthly bank reconciliations implemented for each and every bank accounts of the company?

Answer 36

d. Are monthly bank reconciliations implemented for each and every bank accounts of the company?

Question 37

An auditor’s expert may be either an auditor’s internal or an external expert. Which of the following can not be an auditor’s internal expert?

a. Partner of the Auditor’s Firm
b. Temporary Staff of the Auditor’s Firm
c. Permanent Staff of Auditor’s Network Firm
d. A Prospective CA, soon to join the Auditor’s Firm as a Partner.

Answer 37

d. A Prospective CA, soon to join the Auditor’s Firm as a Partner.

Question 38

Adequate design and effective implementation of Internal Controls may not lead to the identification of:

a. Frauds and errors.
b. Design and Implementation gaps in Processes.
c. Abuse by Process Owners.
d. Segregation of Duties.

Answer 38

c. Abuse by Process Owners.

Question 39

50:50 test determination is popularly used in:

a. Banking Company.
b. Insurance Company.
c. NBFC Company.
d. Stock Trading Company.

Answer 39

c. NBFC Company.

Question 40

What is the difference between management audit and operational audit?

a. Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’, whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit of Management’.

b. Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’, whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’.

c. Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit for Management’, whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’.

d. Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’, whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit for Management’.

Answer 40

b. Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’, whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’.

Question 41

A significant deficiency exists in the process of flow of approval of travel re-imbursements of the officials. This was communicated in the previous year to TCWG and no remedial action was taken on the same so far. The auditors are of the opinion that it need not be communicated again. Is the opinion of the auditors on NOT to communicate the deficiency in internal control reported in the previous year correct?

a. Yes, the auditor is not required to communicate the same again as it is the duty of the management and those charged with governance to maintain the internal control system.

b. No, the current year’s communication may repeat the description from previous communication or simply reference the previous communication.

c. Yes, the auditor is not required to communicate the same again as written representation is being obtained from management and those charged with governance that they are responsible for maintaining internal control.

d. No, it needs to be communicated again but an oral reminder to TCWG on the matter may suffice.

Answer 41

b. No, the current year’s communication may repeat the description from previous communication or simply reference the previous communication.

Question 42

Entity P, is audited by a different auditor than the parent entity Q. The principal auditor i.e. the auditor of entity Q, decides to use the work of auditor of component i.e. entity P, in relation to audit of CFS. In doing so, he should comply with requirements of:

a. SA 600, “ Using the work of Another Auditor”.
b. SA 299, “Joint Audit of Financial statements”.
c. SA 720, “The Auditor’s Responsibilities Relating to Other Information”.
d. SRS 4410, “Compilation Engagements”.

Answer 42

a. SA 600, “ Using the work of Another Auditor”.

Question 43

XYZ bank had an NPA account of M/s G showing recoverable amount of Rs. 55 lakh in the books. It sold the NPA for Rs. 56 lakh. Please select as to which of the following options is the correct accounting:

a. Credit the excess of Rs. 1 lakh to profit on sale of assets.
b. Let the amount remain in G account.
c. Credit the excess of Rs. 1 lakh to Provision for loss on sale of NPAs.
d. Return Rs. 1 lakh to the party purchasing the NPA.

Answer 43

c. Credit the excess of Rs. 1 lakh to Provision for loss on sale of NPAs.

Question 44

You have been given an assignment of audit of IT department of a PSU. A checklist was handed over to you which contained many questions such as,

• Are separate usernames and passwords assigned to individual users?
• Are periodical changes of passwords ensured?
• Are external (offsite) data backups maintained at a place outside the premises?

The type of audit being conducted is likely to be:

a. Comprehensive audit.
b. Propriety audit.
c. Compliance audit.
d. Financial audit.

Answer 44

c. Compliance audit.

Question 45

A report submitted by you after an audit of a PSU is more likely to be finally reviewed by -

a. Public Accounts Committee (PAC).
b. Committee on Public Undertakings (COPU).
c. Estimates Committee.
d. Public sector Committee.

Answer 45

b. Committee on Public Undertakings (COPU).

Question 46

The BOD of XYZ Ltd., one of the top 2000 listed entities meets 4 times a year. What should be the quorum of the Board of Directors from 1st April 2021-

a. 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 independent director.
b. 1/3rd of its total strength or 4 directors, whichever is higher, including at least 1 independent director.
c. 1/3rd of its total strength or 3 directors, whichever is higher, including at least 2 independent director.
d. 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 non-executive director.

Answer 46

a. 1/3rd of its total strength or 3 directors, whichever is higher, including at least 1 independent director.

Question 47

The auditor should ensure that the BOD of the top 100 listed entities shall comprise of -

a. not less than 7 directors.
b. not less than 4 directors.
c. not less than 6 directors.
d. not less than 2 directors.

Answer 47

c. not less than 6 directors.

Question 48

The Audit Committee should consist of the following:

a. minimum of 3 directors with ID forming a majority.
b. minimum of 4 directors with only one ID.
c. minimum 2 directors which are independent.
d. minimum 5 directors with 1 independent woman director.

Answer 48

a. minimum of 3 directors with ID forming a majority.

Question 49

In Case of PSU, Direct Reporting Engagement does not include –

a. Performance audits
b. Compliance audits
c. Financial audits
d. Comprehensive audits

Answer 49

c. Financial audits

Question 50

Description of each key audit matter in the “key audit matters section” needs to cover except following aspects:

a. Reference to related disclosures, if any, in the FS.
b. Explanation on the matter given by management.
c. How the matter was addressed in the audit.
d. Why the matter was considered to be one of most significant in the audit and therefore determined to be a key audit matter.

Answer 50

b. Explanation on the matter given by management.

Question 51

In case of audits of listed entities, other information section is required in auditor’s report when at the date of auditor’s report:

a. Auditor has obtained some or all of the other information.
b. Auditor has obtained all of the other information.
c. Auditor has obtained or expects to obtain the other information.
d. Auditor has obtained some of the other information.

Answer 51

c. Auditor has obtained or expects to obtain the other information.

Question 52

In case of audits of unlisted corporate entities, other information section is required in auditor’s report when at the date of auditor’s report:

a. Auditor has obtained some or all of the other information.
b. Auditor has obtained all of the other information.
c. Auditor has obtained or expects to obtain the other information.
d. Auditor has obtained some of the other information.

Answer 52

a. Auditor has obtained some or all of the other information.

Question 53

If the prior period FS were not audited, the auditor shall state the same in ______.

a. Key audit matter section.
b. Emphasis of matter paragraph.
c. Going concern paragraph.
d. Other matter paragraph.

Answer 53

d. Other matter paragraph.

Question 54

R Ltd has a net worth of Rs. 80 crore and a market capitalization of Rs. 350 crores.

However, its ranking is 800 among all the Listed Companies based on the said capital for the PY.

It has a subsidiary Company P Pvt Ltd whose net worth is Rs. 25 crores. Whether R Ltd and P Ltd are required to undertake Secretarial Audit?

a. Both R Ltd and P Ltd shall undertake Secretarial Audit.
b. Only R Ltd, being a listed entity, is required to undertake Secretarial Audit.
c. None of them are required to undertake Secretarial Audit since they are not among the top 500 Companies on the basis of Market Capitalization.
d. Only R Ltd shall undertake Secretarial Audit since it is among the top 1,000 Companies on the basis of Market Capitalization.

Answer 54

a. Both R Ltd and P Ltd shall undertake Secretarial Audit.

Question 55

K Ltd is a garment manufacturing company having HO in Mumbai, 4 factories, 10 marketing offices across the country. The company uses SAP ERP for almost all its business processes except Payroll which is being outsourced to an Agency in Bangalore. Once payroll is processed, data is sent to the HR department at HO. HR department shares such details with Finance Department at HO for making the payment. Journal entries are recorded in SAP. Employees complained about incorrect IT calculation and KPC Ltd appointed a CA firm to review the payroll system in detail. It was observed that logic of IT calculation is not as per the requirements of the Act and when the outsourced Agency confirmed that they carried out program changes recently and error may be due to such changes. The Auditor attributed the error of such incorrect software changes to:

a. Loss of Application Controls
b. Loss of Overall Controls
c. Loss of IT General Controls
d. Human Oversight

Answer 55

c. Loss of IT General Controls

Question 56

While auditing V Ltd, CA D divided the whole population of trade receivables balances to be tested in a few separate groups called ‘strata’ and started taking a sample from each of them. He treated each stratum as if it was a separate population. He divided the trade receivables balances of V Ltd for the FY 2020-21 into groups on the basis of personal judgment as follows:

Sl. No. Particulars
1 Balances in excess of Rs. 10,00,000
2 Balances in the range of Rs. 7,75,001 to Rs. 10,00,000
3 Balances in the range of Rs. 5,50,001 to Rs. 7,75,000
4 Balances in the range of Rs. 2,25,001 to Rs. 5,50,000
5 Balances Rs. 2,25,000 and below

From the above-mentioned groups, CA D picked up different percentage of items for examination from each of the groups, for example, from the top group, i.e., balances in excess of Rs. 10,00,000, he selected all the items to be examined; from the second group, he opted for 25% of the items to be examined; from the lowest group, he selected 2% of the items for examination; and so on from rest of the groups. Which one of the following methods of sample selection is the following?
a. Systematic Sampling.
b. Stratified Sampling.
c. Section Sampling.
d. Selection Sampling.

Answer 56

b. Stratified Sampling.

Question 57

The notes to the account statement of N Ltd shows the break-up of accounts payable for the FY 2020-21 as follows:

Acc Payable Amount (in Rs.)
Mr. K 1,20,000
Mr. R 40,000
Mr. B 14,56,000
Total 16,16,000

CA R, the auditor of N Ltd, wants to investigate the valuation of accounts payable of Mr. B amounting to Rs. 14,56,000.

Which of the following procedures is best fitted & more reliable to be followed by CA. R to get more reliable evidence for the existence of such balance as on 31 March 2021?

a. Inspect each and every journal entry passed in the books of N Ltd.
b. Ask N Ltd to provide the details of payment made during the year 2021-22.
c. Inspect the invoices issued by Mr. B and the payments made.
d. Interrogate the cash manager of N Ltd.

Answer 57

c. Inspect the invoices issued by Mr. B and the payments made.

Question 58

KKR Ltd. is a medium-sized company engaged in the business of ecommerce. The company’s operations have remained stable over the years and its profitability has been going down. The company also ventured into different markets over the last few years but that has not helped much in terms of growth of business or increasing the profitability. The company’s immediate plan is to expand its operations with focus on increasing the profitability.

The company was looking for funds to achieve this objective and issued a prospectus to the public to subscribe to its shares.
The financial statements of the company for the year ended 31st March 2021 included in the prospectus showed a very different picture of the company particularly in respect of its profits.

It was later on found that some of the information contained in the prospectus was misstated i.e., it was untrue and misleading to attract the public to subscribe the shares of the company.

Legal action was taken by the stakeholders against the company including its auditors and the company’s management/ directors were confident that they would not be required to face any action considering the fact that the financial statements were duly audited by a reputed firm of Chartered Accountants. If at all any problem arises, it would be the responsibility of the auditors.

Please advise whether anyone can be held liable in this matter or not. If yes, what action can be taken against him/them? If no, what should be the corrective action?

a. The understanding of the directors is correct and the auditors should be held liable under section 447 of the Companies Act.

b. The understanding of the directors is wrong. They would be held liable under section 447 of the Companies Act and not the auditors because responsibility for the prospectus lies with the management.

c. This may lead to criminal liability wherein every person who authorizes the issue of such prospectus shall be liable under section 447 of the Companies Act.

d. This may lead to civil liability wherein every person who authorizes the issue of such prospectus shall be liable under section 447 of the Companies Act.

Answer 58

c. This may lead to criminal liability wherein every person who authorizes the issue of such prospectus shall be liable under section 447 of the Companies Act.

Question 59

CA D has established another branch in the same city. Branch was inaugurated on 3rd October 2020 and on 4th October 2020, friends of CA D gave an article on the front page of local newspaper congratulating CA D on opening of another branch which also includes half page photograph of CA D with his consent.

In your opinion was the news in newspaper a misconduct on the part of CA D and what actions can be taken again him?

a. Yes, it is a misconduct under Clause 8 of Part I of Second Schedule, and he can be reprimanded, his name can be removed from the register of members for 3 years and fine up to Rs. 5,00,000.

b. Yes, it is a misconduct under Clause 5 of Part I of First Schedule, and he can be reprimanded, his name can be removed from the register of members for 3 months and fine up to Rs. 1,00,000.

c. Yes, it is a misconduct under Clause 7 of Part I of First Schedule, and he can be reprimanded, his name can be removed from the register of members for 3 months and fine up to Rs. 1,00,000.

d. Yes, it is a misconduct under Clause 8 of Part I of Second Schedule, and he can be reprimanded, his name can be removed from the register of members permanently and fine up to Rs. 5,00,000.

Answer 59

c. Yes, it is a misconduct under Clause 7 of Part I of First Schedule, and he can be reprimanded, his name can be removed from the register of members for 3 months and fine up to Rs. 1,00,000.

Question 60

K Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C) with a limit of Rs. 40 lacs each against the security of fixed deposit it had with those banks and an unsecured overdraft from a financial institution (Financial Institution X) of Rs. 36 lacs.

As on 30 October 2020, the management used the overdraft fully of the A & C bank to the tune of Rs. 40 lacs each. However, the overdraft of second bank (Bank B) was not used until 31 December 2021. On 31 December 2021, Management took overdraft of B bank and very next day management paid the overdraft of C bank as the rate of interest charged by Bank C on overdraft facility was 15% whereas, the rate of interest charged by Bank B was 12%.

As at 31 March 2022 only overdraft of Bank A and Bank B were used fully, overdrafts of Bank C and Financial Institution X were unused. The PUC and reserves of the company as at that date was Rs. 85 lacs and its revenue for the FY ended on 31 March 2022 was Rs. 8.95 crores. The management of the company is of the opinion that CARO, 2020 is not applicable to it because turnover and PUC were within the limits prescribed. With respect to the loans, management was of the view that the total O/s as at 31 March 2022 is less than the prescribed limit. The company further contended that loan limit is to be reckoned per bank or financial institution and not cumulatively. Comment.

a. The CARO 2020 is applicable to the company as the TO of the company exceeds the prescribed limit.
b. The CARO 2020 is not applicable to the company as the TO of the company does not exceed the prescribed limit.
c. The CARO 2020 is not applicable to the company as the borrowing of the company does not exceed the prescribed limit.
d. The CARO 2020 is applicable to the company as the borrowing of the company exceeds the prescribed limit.

Answer 60

d. The CARO 2020 is applicable to the company as the borrowing of the company exceeds the prescribed limit.

Question 61

M/s H Limited, had recently issued right shares for all the existing shareholders. The total proceeds collected amounted to Rs. 200 crore, out of which 50% was planned to be used for construction of a new factory next to the existing one and the balance was to be used for working capital purpose. However, due to the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9% of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park 11 % of the working capital fund in government securities.

M/s L Limited, an unlisted associate entity of H Limited had similarly raised funds through qualified institutional placement & used the funds fully for the specified purpose. The auditor of the L Limited (Mr. G, partner of M/s GK & Associates) and the auditor of H Limited (Mr. Q, partner of M/s CYQ & Associates) suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR Regulation 32.

However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.

Mr. C then decided to induct Mr. J, a newly qualified CA as a partner in his firm. After this, the firm got an audit assignment from M/s B Limited. Mr. C consulted with his partner whether to accept the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of Rs. 6.8 lakh) in the said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his acceptance. Therefore, the offer was dropped.

Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal representative of the deceased partner to receive share of profit from the firm and requested for such share of profit. However, Mr. J informed that there is no such provision as per the CA Act and denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the ICAI against Mr. J.

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

Is the advice of Mr. Q correct in case of Head Limited? If yes what are the details which need to be disclosed by the company?

(a) Yes. The company shall indicate the deviations in use of proceeds and category wise variation between projected utilization and actual utilization.

(b) No. There is no need to indicate the statement since such deviations were due to Covid-19 pandemic.

(c) Yes. The company shall indicate the deviations in use of proceeds in form of an explanatory statement.

(d) Yes. The company shall indicate the% of deviation if such deviation is more than 10% of the total funds allotted for the specified purpose. Hence, the company shall indicate only the deviation in utilization funds allocated for working capital purpose.

Answer 61

(a) Yes. The company shall indicate the deviations in use of proceeds and category wise variation between projected utilization and actual utilization.

Question 62

M/s H Limited, had recently issued right shares for all the existing shareholders. The total proceeds collected amounted to Rs. 200 crore, out of which 50% was planned to be used for construction of a new factory next to the existing one and the balance was to be used for working capital purpose. However, due to the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9% of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park 11 % of the working capital fund in government securities.

M/s L Limited, an unlisted associate entity of H Limited had similarly raised funds through qualified institutional placement & used the funds fully for the specified purpose. The auditor of the L Limited (Mr. G, partner of M/s GK & Associates) and the auditor of H Limited (Mr. Q, partner of M/s CYQ & Associates) suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR Regulation 32.

However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.

Mr. C then decided to induct Mr. J, a newly qualified CA as a partner in his firm. After this, the firm got an audit assignment from M/s B Limited. Mr. C consulted with his partner whether to accept the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of Rs. 6.8 lakh) in the said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his acceptance. Therefore, the offer was dropped.

Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal representative of the deceased partner to receive share of profit from the firm and requested for such share of profit. However, Mr. J informed that there is no such provision as per the CA Act and denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the ICAI against Mr. J.

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

In case if H Limited is to report the deviation in use of funds, at what interval should it report the same?

(a) Disclose it every year in its Annual Report
(b) Biannual reporting
(c) Every quarter
(d) Monthly reporting, till the funds are fully utilized.

Answer 62

(c) Every quarter

Question 63

M/s H Limited, had recently issued right shares for all the existing shareholders. The total proceeds collected amounted to Rs. 200 crore, out of which 50% was planned to be used for construction of a new factory next to the existing one and the balance was to be used for working capital purpose. However, due to the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9% of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park 11 % of the working capital fund in government securities.

M/s L Limited, an unlisted associate entity of H Limited had similarly raised funds through qualified institutional placement & used the funds fully for the specified purpose. The auditor of the L Limited (Mr. G, partner of M/s GK & Associates) and the auditor of H Limited (Mr. Q, partner of M/s CYQ & Associates) suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR Regulation 32.

However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.

Mr. C then decided to induct Mr. J, a newly qualified CA as a partner in his firm. After this, the firm got an audit assignment from M/s B Limited. Mr. C consulted with his partner whether to accept the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of Rs. 6.8 lakh) in the said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his acceptance. Therefore, the offer was dropped.

Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal representative of the deceased partner to receive share of profit from the firm and requested for such share of profit. However, Mr. J informed that there is no such provision as per the CA Act and denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the ICAI against Mr. J.

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

Assuming yourself as the auditor of H Limited, what would be your stand on reporting the deviation in utilization of funds under CARO 2020?

(a) There is no need to report the matter under CARO, since such deviations were due to Covid-19 pandemic.
(b) The matter should be reported under CARO, under clause (xi)(a)
(c) The matter should be reported under CARO, under clause (x)
(d) The matter should be reported under CARO, under clause (xvi)(b)

Answer 63

(c) The matter should be reported under CARO, under clause (x)

Question 64

M/s H Limited, had recently issued right shares for all the existing shareholders. The total proceeds collected amounted to Rs. 200 crore, out of which 50% was planned to be used for construction of a new factory next to the existing one and the balance was to be used for working capital purpose. However, due to the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9% of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park 11 % of the working capital fund in government securities.

M/s L Limited, an unlisted associate entity of H Limited had similarly raised funds through qualified institutional placement & used the funds fully for the specified purpose. The auditor of the L Limited (Mr. G, partner of M/s GK & Associates) and the auditor of H Limited (Mr. Q, partner of M/s CYQ & Associates) suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR Regulation 32.

However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.

Mr. C then decided to induct Mr. J, a newly qualified CA as a partner in his firm. After this, the firm got an audit assignment from M/s B Limited. Mr. C consulted with his partner whether to accept the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of Rs. 6.8 lakh) in the said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his acceptance. Therefore, the offer was dropped.

Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal representative of the deceased partner to receive share of profit from the firm and requested for such share of profit. However, Mr. J informed that there is no such provision as per the CA Act and denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the ICAI against Mr. J.

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

In the above case, is the act of Mr. J to deny share of profits to legal representative of Mr. C right? What is the relevant provision of the CA Act which you need to refer in this case?

(a) Mr. J has no right to deny the share of profit since it is given in the partnership agreement. The relevant provision to be considered here is Clause 2 of Part I of First Schedule of CA Act.

(b) Mr. J has all right to deny the share of profit since it shall lead to professional misconduct. The relevant provision to be considered here is clause 2 of Part I of First Schedule of CA Act.

(c) Mr. J has no right to deny the share of profit since it is given in the partnership agreement. The relevant provision to be considered here is Clause 4 of Part I of First Schedule of CA Act.

(d) Mr. J is correct in denying the share of profit. Though the same is mentioned in the agreement, it is against the provisions of CA Act. The relevant provision to be considered here is Clause 1 of Part II of Second Schedule.

Answer 64

(a) Mr. J has no right to deny the share of profit since it is given in the partnership agreement. The relevant provision to be considered here is Clause 2 of Part I of First Schedule of CA Act.

Question 65

M/s H Limited, had recently issued right shares for all the existing shareholders. The total proceeds collected amounted to Rs. 200 crore, out of which 50% was planned to be used for construction of a new factory next to the existing one and the balance was to be used for working capital purpose. However, due to the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9% of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park 11 % of the working capital fund in government securities.

M/s L Limited, an unlisted associate entity of H Limited had similarly raised funds through qualified institutional placement & used the funds fully for the specified purpose. The auditor of the L Limited (Mr. G, partner of M/s GK & Associates) and the auditor of H Limited (Mr. Q, partner of M/s CYQ & Associates) suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR Regulation 32.

However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.

Mr. C then decided to induct Mr. J, a newly qualified CA as a partner in his firm. After this, the firm got an audit assignment from M/s B Limited. Mr. C consulted with his partner whether to accept the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of Rs. 6.8 lakh) in the said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his acceptance. Therefore, the offer was dropped.

Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal representative of the deceased partner to receive share of profit from the firm and requested for such share of profit. However, Mr. J informed that there is no such provision as per the CA Act and denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the ICAI against Mr. J.

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

Had the firm accepted the audit assignment of B Limited, would it have led to invalid appointment as per the Companies Act, 2013? If yes, under what provision?

(a) No. As explained by Mr. C, since the loan was against a fixed deposit (loan against a collateral) appoint of the firm would not be void had they accepted the offer.

(b) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the section 141 (3)(d)(ii) of the Companies Act, 2013.

(c) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the section 141 (3)(d)(iii) of the Companies Act, 2013.

(d) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the section 141(3)(c)(ii) of the Companies Act, 2013.

Answer 65

(b) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the section 141 (3)(d)(ii) of the Companies Act, 2013.

Question 66

M/s A & Co. were appointed as internal auditors of M/s M Limited, whose shares were held by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.

CA S and his articled assistant Mr. J were a part of the team which was looking after the above assignment. As a part of the work, Mr. J was required to take care of the P2P internal controls established to ensure the three-way match is properly functioning. Being new to internal audit, he asked for help from a fellow team member regarding the above matter.

After completion of the audit, the firm submitted its report directly to the BOD of the company. A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that the existing internal audit system in the company was not commensurate with its size and nature of business.

Following this, the company offered the assignment of Tax Audit to M/s A & Co. itself. All the partners were happy to accept the offer, except CA N, an ex-articled assistant and newly inducted partner of the firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct under the CA Act. However, despite his advice, the firm went on to accept the offer.

After the above incident, CA N resigned from the firm and started his own practice as a sole proprietor. Few days after the resignation of CA N, the following things happened:

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.

(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

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

Assuming yourself to be a fellow team member of Mr. J, explain him what is a three-way match internal control involved in P2P process.

(a) Matching of Purchase order, Sales order & Invoice raised to ensure all ordered quantity of intended goods have been invoiced and proper control over quantity of inventory is maintained.

(b) Matching of Sales order, Goods delivery note & invoice to ensure all ordered quantity of intended goods have been delivered and invoiced accordingly.

(c) Matching of Sales order, Invoice & Payment receipt details to ensure all ordered quantity of intended goods have been invoiced and payment for the same is received.

(d) Matching of Purchase order, Goods receipt note & invoice to ensure all ordered quantity of intended goods have been received and invoiced accordingly.

Answer 66

(d) Matching of Purchase order, Goods receipt note & invoice to ensure all ordered quantity of intended goods have been received and invoiced accordingly.

Question 67

M/s A & Co. were appointed as internal auditors of M/s M Limited, whose shares were held by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.

CA S and his articled assistant Mr. J were a part of the team which was looking after the above assignment. As a part of the work, Mr. J was required to take care of the P2P internal controls established to ensure the three-way match is properly functioning. Being new to internal audit, he asked for help from a fellow team member regarding the above matter.

After completion of the audit, the firm submitted its report directly to the BOD of the company. A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that the existing internal audit system in the company was not commensurate with its size and nature of business.

Following this, the company offered the assignment of Tax Audit to M/s A & Co. itself. All the partners were happy to accept the offer, except CA N, an ex-articled assistant and newly inducted partner of the firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct under the CA Act. However, despite his advice, the firm went on to accept the offer.

After the above incident, CA N resigned from the firm and started his own practice as a sole proprietor. Few days after the resignation of CA N, the following things happened:

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.

(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

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

Assuming yourself to be the statutory auditors of the company, would you need to mention about the details in the internal audit under CARO 2020? If yes, under what clause should it be mentioned?

(a) The above matter should be reported under clause (xiv) of CARO 2020
(b) The above matter need not be reported under CARO, but it shall be reported under EOM Paragraph as per SA 706.
(c) The above matter should be reported under clause (xviii) of CARO 2020
(d) The above matter should be reported under clause (xv) of CARO 2020

Answer 67

(a) The above matter should be reported under clause (xiv) of CARO 2020

Question 68

M/s A & Co. were appointed as internal auditors of M/s M Limited, whose shares were held by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.

CA S and his articled assistant Mr. J were a part of the team which was looking after the above assignment. As a part of the work, Mr. J was required to take care of the P2P internal controls established to ensure the three-way match is properly functioning. Being new to internal audit, he asked for help from a fellow team member regarding the above matter.

After completion of the audit, the firm submitted its report directly to the BOD of the company. A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that the existing internal audit system in the company was not commensurate with its size and nature of business.

Following this, the company offered the assignment of Tax Audit to M/s A & Co. itself. All the partners were happy to accept the offer, except CA N, an ex-articled assistant and newly inducted partner of the firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct under the CA Act. However, despite his advice, the firm went on to accept the offer.

After the above incident, CA N resigned from the firm and started his own practice as a sole proprietor. Few days after the resignation of CA N, the following things happened:

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.

(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

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

From the above information that M/s M Limited appointed an internal auditor, what could you infer about their PUSC, O/s deposit & turnover?

(a) Paid up share capital of≥ 40 crore Outstanding deposits> 20 crore; Turnover≥ 190 crore
(b) Paid up share capital of≥25 crore Outstanding deposits≥ 25 crore; Turnover 2≥ 100 crore
(c) Paid up share capital of≥ 50 crore Outstanding deposits≥ 25 crore; Turnover≥ 200 crore
(d) Paid up share capital of≥ 45 crore Outstanding deposits≥ 15 crore; Turnover> 100 crore

Answer 68

(c) Paid up share capital of≥ 50 crore Outstanding deposits≥ 25 crore; Turnover≥ 200 crore

Sec 138 - Internal Ar

a. Every listed Company

b. Every unlisted Public company having -
- PUSC = 50 cr or more
- TO = 200 cr or more
- O/s loans or borrowings from banks or PFI = exceeding 100 Cr or more
- O/s deposits = 25 cr or more

–> PUSC & TO = during the preceding FY
–> O/s loans & deposits = at any point of time during the preceding FY

c. Every private Co having -
- TO &
- O/s loans

Question 69

M/s A & Co. were appointed as internal auditors of M/s M Limited, whose shares were held by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.

CA S and his articled assistant Mr. J were a part of the team which was looking after the above assignment. As a part of the work, Mr. J was required to take care of the P2P internal controls established to ensure the three-way match is properly functioning. Being new to internal audit, he asked for help from a fellow team member regarding the above matter.

After completion of the audit, the firm submitted its report directly to the BOD of the company. A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that the existing internal audit system in the company was not commensurate with its size and nature of business.

Following this, the company offered the assignment of Tax Audit to M/s A & Co. itself. All the partners were happy to accept the offer, except CA N, an ex-articled assistant and newly inducted partner of the firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct under the CA Act. However, despite his advice, the firm went on to accept the offer.

After the above incident, CA N resigned from the firm and started his own practice as a sole proprietor. Few days after the resignation of CA N, the following things happened:

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.

(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

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

Will accepting the Tax Audit offer lead to professional misconduct? If yes, as per which clause?

(a) No. There will be no professional misconduct on the firm, if it accepts the offer.

(b) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 4 of Part I of Second Schedule read along with Council Guidelines.

(c) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 12 of Part I of First Schedule.

(d) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 2 of Part I of Second Schedule read along with Council guidelines.

Answer 69

(b) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 4 of Part I of Second Schedule read along with Council Guidelines.

Question 70

M/s A & Co. were appointed as internal auditors of M/s M Limited, whose shares were held by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.

CA S and his articled assistant Mr. J were a part of the team which was looking after the above assignment. As a part of the work, Mr. J was required to take care of the P2P internal controls established to ensure the three-way match is properly functioning. Being new to internal audit, he asked for help from a fellow team member regarding the above matter.

After completion of the audit, the firm submitted its report directly to the BOD of the company. A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that the existing internal audit system in the company was not commensurate with its size and nature of business.

Following this, the company offered the assignment of Tax Audit to M/s A & Co. itself. All the partners were happy to accept the offer, except CA N, an ex-articled assistant and newly inducted partner of the firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct under the CA Act. However, despite his advice, the firm went on to accept the offer.

After the above incident, CA N resigned from the firm and started his own practice as a sole proprietor. Few days after the resignation of CA N, the following things happened:

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.

(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

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

Comment on following incidents (i) & (ii) discussed in the scenario from the perspective of Professional Ethics as per the CA Act.

(i) M/s A & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the magazine.
(ii) CA N issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The ad contained his name, phone number and addresses of Social Networking sites.

(a) Incident (ii) makes CA N guilty of professional misconduct, since he is advertising for seeking partnership.
(b) Neither of the incidents violate any provisions of CA Act. Hence, there is no professional misconduct.
(c) Incident (i) makes M/s A & Co. firm guilty of professional misconduct, as the advertisement is published in newspaper other than that issued by the Institute.
(d) Incident (ii) makes CA N guilty of professional misconduct, since he has provided the addresses of his social networking sites.

Answer 70

(b) Neither of the incidents violate any provisions of CA Act. Hence, there is no professional misconduct.

Question 71

S Company got a show cause notice from State Pollution Control Board for the contravention of the provisions of Hazardous and waste Management Rule. As per SA 250, the auditor shall perform the audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the FS. As the audit team of the company became aware of information concerning an instance of non-compliance with law, what would NOT be the audit procedure to be performed?

(a) Understand the nature of the act and circumstances in which it has occurred and obtain further information to evaluate the possible effect on the FS.

(b) Discuss the matter with management and if they do not provide sufficient information; and if the effect of non-compliance seems to be material, legal advice may be obtained.

(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating procedures are designed to assist in the prevention of non-compliance with law and regulation and report accordingly.

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

Answer 71

(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating procedures are designed to assist in the prevention of non-compliance with law and regulation and report accordingly.

Question 72

B & Co. has received an order in writing from the CG, in respect of one of its clients, to carry out an investigation u/s 210 of the Companies Act 2013.

During the course of carrying out investigation as above, B & Co. requires certain evidence from a place outside India in order to establish the correctness of an investment in the shares of a company outside India.

What should be the procedure of B & Co. to seek evidence from outside India for the investigation?

(a) Seeking evidence from outside India for investment in shares outside India is outside the scope of investigation.

(b) An application is to be made to the competent court in India by the inspector and such court may issue a letter of request to a court or an authority in such country for seeking evidence.

(c) The evidence can be sought by electronic mail by writing to the concerned authorities of the entity outside India.

(d) Powers of seeking evidence outside India is available only to an investigator u/s 212 - Serious Fraud Investigation.

Answer 72

(b) An application is to be made to the competent court in India by the inspector and such court may issue a letter of request to a court or an authority in such country for seeking evidence.

Question 73

While reporting under clause (ii) of Paragraph 3 of CARO 2020, which of the following is correct:

(a) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and shortages within the class of an inventory and must be based on value for each class of Inventory.

(b) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and shortages within the class of an inventory and must be based on value for all classes of Inventory.

(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within the class of an inventory and must be based on value for each class of Inventory.

(d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within the class of an inventory and must be based on value for all classes of Inventory.

Answer 73

(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within the class of an inventory and must be based on value for each class of Inventory.

Question 74

The S General Insurance Company has entered into reinsurance contract with A Reinsurance Co. Ltd. against the risk of fire only. A Reinsurance Co. Ltd. is one of the largest reinsurers in India.

Identify the type of reinsurance contract between S General Insurance Company and A Reinsurance Co. Ltd.

(a) Treaty Reinsurance.
(b) Proportional Treaty Reinsurance.
(c) Non-Proportional Treaty Reinsurance.
(d) Facultative Reinsurance.

Answer 74

(d) Facultative Reinsurance.

Question 75

The amount of materiality initially determined needs to be revised as the audit progresses:

(a) If there is a delay in the audit.

(b) In the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.

(c) Only in the event of becoming aware of information during the audit that would have caused the auditor to have determined a higher amount (or amounts) initially.

(d) Only in the event of becoming aware of information during the audit that would have caused the auditor to have determined a lower amount (or amounts) initially.

Answer 75

(b) In the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.

Question 76

While examining the computation of Demand and Time liabilities which of the following is to be included in liabilities:

(a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of recovery.

(b) Amounts received in Indian Currency against import bills and held in sundry deposits pending receipts of final rates.

(c) Net credit balance in branch adjustment accounts including these relating to foreign branches.

(d) Margins held and kept in sundry deposits for funded facilities.

Answer 76

(c) Net credit balance in branch adjustment accounts including these relating to foreign branches.

Question 77

While verifying the salary expense of employees, the auditor has been asked to rely on the values as per SAP software and some hard copy reports and documents as the HRMS package (source software) has become corrupt during the year and the management is not having any data backup. How should the auditor deal with the same?

(a) The auditor should issue a qualified opinion as records are destroyed and he is unable to obtain SAAE.

(b) The auditor should perform alternative procedures to obtain SAAE before disclaiming the opinion.

(c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls.

(d) The auditor can rely on the SAP data and there is no need for qualification of report.

Answer 77

(b) The auditor should perform alternative procedures to obtain SAAE before disclaiming the opinion.

Question 78

As per SA 701 - Communicating Key audit matters in the Independent auditor’s Report, which among the following areas should CA & Co. take into account to determine “Key Audit Matter”?

(i) The effect on audit of significant transactions that took place in the FY.

(ii) Areas of high risk as assessed and reported by management’s expert.

(iii) Significant auditor judgement relating to areas in the financials that involved significant management judgement.

(a) (i) & (ii)
(b) (ii) only
(c) (i) & (iii)
(d) (i), (ii) & (iii)

Answer 78

(c) (i) & (iii)

Question 79

R Ltd. was set up initially as a private limited company. Subsequently, it got converted into a public company. The company’s management has plans of expansion but the business was not growing in an organic manner.

Therefore, the management decided to acquire the competitors. During the FY ended 31 March, 2021 , the company acquired two companies in India and France in September, 2020 and January, 2021 respectively.

The company controls both of these companies as per the criteria laid down in the Companies Act, 2013 as well as the applicable accounting standards.

The management started discussions with the auditors regarding the audit wherein it was also pointed out by the auditors that the management should also prepare CFS, if they want. Management needs your advise on the same.

(a) Management must prepare the CFS as per the requirements of the Companies Act, 2013.

(b) Management has a choice not to prepare CFS but should go for that considering that its true performance and financial position can then be demonstrated.

(c) Management could have prepared CFS if the acquired companies would have completed at least one year post acquisition.

(d) Management must prepare CFS but it should include only the company acquired in India.

Answer 79

(a) Management must prepare the CFS as per the requirements of the Companies Act, 2013.

Question 80

G Pvt Ltd duly appoints CA P as the tax auditors of their Company and the appointed Tax-auditor chalks out a detailed Audit Programme to be assigned to her audit engagement team to carry out the tax audit efficiently & effectively.

Which of the following situations wouldn’t warrant an alteration in the Audit Programme during the course of Audit by the Tax Auditor of G Pvt Ltd during the next FY?

(a) Significant changes in Procedures and Personnel of the Company subsequent to audit Procedures.

(b) A Substantial increase in the volume of turnover as against the anticipated results of the Company.

(c) An extraordinary increase in the amount of Book Debts as compared to that in the First Year.

(d) A New Contract received by G Ltd from a Foreign Client during the course of the audit.

Answer 80

(d) A New Contract received by G Ltd from a Foreign Client during the course of the audit.

Question 81

HF Limited - ND, a NBFC which is exclusively into housing finance business completed one month of operations. They approached their auditor M/s UVW & Co. CAs to know about the process to apply for certificate of registration u/s 45 IA of RBI Act. After calculating the NOF (which stood at Rs. 249 lakh) and considering other details, the company was told that they need not apply for the certificate.

After the completion of the FY, UVW & Co. started the statutory audit and tax audit for HF limited. During the course of the audit, the management disagreed on the following matters:

(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The carrying value before revaluation was Rs. 77 lakh and the value post revaluation was Rs. 84.70 lakh. The auditors wanted to mention the same along with the amount of change in CARO.

(II) It was found that an amount of Rs. 5 lakh had been written off as bad debts. The complete amount was not admissible as per the Income tax Act and hence the auditor decided to mention about the same under clause 19 of the tax audit report and disallow the inadmissible amount.

MC Limited approached UVW & Co. for providing few management and consultancy services for their company. The offers given by the company was:

(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters

Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as category IV merchant banker under SEBl’s Rules and Regulations.

Upon obtaining the same, he was approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, under
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because of the above incident.

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

Why the auditor advised HF Limited - ND, a NBFC not to apply for certificate under section 45 IA ?

(a) Since the company is Non-Deposit taking NBFC, there is no need to apply for certificate of registration.
(b) The company needs to completed one year of operations before applying for the certificate.
(c) Net owned funds are below the stipulated limit of Rs. 250 lakh, hence the company need not apply for certificate.
(d) The company falls under exempt category as notified by RBI.

Answer 81

(d) The company falls under exempt category as notified by RBI.

Question 82

HF Limited - ND, a NBFC which is exclusively into housing finance business completed one month of operations. They approached their auditor M/s UVW & Co. CAs to know about the process to apply for certificate of registration u/s 45 IA of RBI Act. After calculating the NOF (which stood at Rs. 249 lakh) and considering other details, the company was told that they need not apply for the certificate.

After the completion of the FY, UVW & Co. started the statutory audit and tax audit for HF limited. During the course of the audit, the management disagreed on the following matters:

(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The carrying value before revaluation was Rs. 77 lakh and the value post revaluation was Rs. 84.70 lakh. The auditors wanted to mention the same along with the amount of change in CARO.

(II) It was found that an amount of Rs. 5 lakh had been written off as bad debts. The complete amount was not admissible as per the Income tax Act and hence the auditor decided to mention about the same under clause 19 of the tax audit report and disallow the inadmissible amount.

MC Limited approached UVW & Co. for providing few management and consultancy services for their company. The offers given by the company was:

(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters

Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as category IV merchant banker under SEBl’s Rules and Regulations.

Upon obtaining the same, he was approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, under
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because of the above incident.

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

Is the auditor’s decision to report issue (I) given in the situation correct? What is the reason?

(a) Yes. Since the revaluation of asset has brought a change of 10% in the carrying amount, the same shall be reported in CARO, including the amount.

(b) No. The reporting requirement under CARO relates to physical verification of assets, record maintenance, etc. only. It does not require the details of revaluation to be provided.

(c) No. Since no intangible asset is revalued, the above matter need not be reported.

(d) No. Since the revaluation of asset has not reduced the carrying value, the same need not be reported.

Answer 82

(a) Yes. Since the revaluation of asset has brought a change of 10% in the carrying amount, the same shall be reported in CARO, including the amount.

Question 83

HF Limited - ND, a NBFC which is exclusively into housing finance business completed one month of operations. They approached their auditor M/s UVW & Co. CAs to know about the process to apply for certificate of registration u/s 45 IA of RBI Act. After calculating the NOF (which stood at Rs. 249 lakh) and considering other details, the company was told that they need not apply for the certificate.

After the completion of the FY, UVW & Co. started the statutory audit and tax audit for HF limited. During the course of the audit, the management disagreed on the following matters:

(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The carrying value before revaluation was Rs. 77 lakh and the value post revaluation was Rs. 84.70 lakh. The auditors wanted to mention the same along with the amount of change in CARO.

(II) It was found that an amount of Rs. 5 lakh had been written off as bad debts. The complete amount was not admissible as per the Income tax Act and hence the auditor decided to mention about the same under clause 19 of the tax audit report and disallow the inadmissible amount.

MC Limited approached UVW & Co. for providing few management and consultancy services for their company. The offers given by the company was:

(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters

Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as category IV merchant banker under SEBl’s Rules and Regulations.

Upon obtaining the same, he was approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, under
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because of the above incident.

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

Assuming yourself to be a part of the management, how would you respond to point (II) relating to reporting of written off Bad debts in Tax Audit Report ?

(a) Completely agree with the above matter as told by the auditor.
(b) Disagree to the point, since the above details need not be reported under clause 19 of Form 3CD.
(c) Disagree to the point, since the above details need not be reported under clause 19 of Form 3CD, but under clause 25 of Form 3CD.
(d) Partially agree with respect to reporting the same, but not with respect to the amount being disallowed by the auditor.

Answer 83

(b) Disagree to the point, since the above details need not be reported under clause 19 of Form 3CD.

Question 84

HF Limited - ND, a NBFC which is exclusively into housing finance business completed one month of operations. They approached their auditor M/s UVW & Co. CAs to know about the process to apply for certificate of registration u/s 45 IA of RBI Act. After calculating the NOF (which stood at Rs. 249 lakh) and considering other details, the company was told that they need not apply for the certificate.

After the completion of the FY, UVW & Co. started the statutory audit and tax audit for HF limited. During the course of the audit, the management disagreed on the following matters:

(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The carrying value before revaluation was Rs. 77 lakh and the value post revaluation was Rs. 84.70 lakh. The auditors wanted to mention the same along with the amount of change in CARO.

(II) It was found that an amount of Rs. 5 lakh had been written off as bad debts. The complete amount was not admissible as per the Income tax Act and hence the auditor decided to mention about the same under clause 19 of the tax audit report and disallow the inadmissible amount.

MC Limited approached UVW & Co. for providing few management and consultancy services for their company. The offers given by the company was:

(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters

Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as category IV merchant banker under SEBl’s Rules and Regulations.

Upon obtaining the same, he was approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, under
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because of the above incident.

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

Assuming all responsibilities & protocols being fulfilled properly, from the above case scenario, what can you infer about the appointment of M/s UVW & Co. as auditors for HF limited?

(a) They were appointed by Shareholders.
(b) They were appointed by Empanelment Committee.
(c) They were appointed by BOD.
(d) They were re-appointed as auditors.

Answer 84

(c) They were appointed by BOD.

Question 85

HF Limited - ND, a NBFC which is exclusively into housing finance business completed one month of operations. They approached their auditor M/s UVW & Co. CAs to know about the process to apply for certificate of registration u/s 45 IA of RBI Act. After calculating the NOF (which stood at Rs. 249 lakh) and considering other details, the company was told that they need not apply for the certificate.

After the completion of the FY, UVW & Co. started the statutory audit and tax audit for HF limited. During the course of the audit, the management disagreed on the following matters:

(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The carrying value before revaluation was Rs. 77 lakh and the value post revaluation was Rs. 84.70 lakh. The auditors wanted to mention the same along with the amount of change in CARO.

(II) It was found that an amount of Rs. 5 lakh had been written off as bad debts. The complete amount was not admissible as per the Income tax Act and hence the auditor decided to mention about the same under clause 19 of the tax audit report and disallow the inadmissible amount.

MC Limited approached UVW & Co. for providing few management and consultancy services for their company. The offers given by the company was:

(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters

Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as category IV merchant banker under SEBl’s Rules and Regulations.

Upon obtaining the same, he was approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, under
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because of the above incident.

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

In the above case of Mr. U, which act of his could have led to professional misconduct?

(a) Obtaining registration as category IV merchant banker.
(b) Allowing the caption ‘Advisor to the Issue’ in the offer document and advertisement.
(c) Accepting the offer of HF limited without communicating the same to their auditors.
(d) Allowing his name and address to be displayed prominently in the offer document and advertisement.

Answer 85

(d) Allowing his name and address to be displayed prominently in the offer document and advertisement.

Question 86

While preparing the FS for the YE on 31 March 2022, ABC Limited, a listed entity, provided the below information:

Excerpt of Standalone BS of ABC Ltd as of 31 March 2022
(in Rs. Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total O/s dues of micro enterprises and 300
small enterprises; and
(B) total O/s dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)

Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (Rs. in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410

Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total T/P reported in the BS as of 31 March 2022 and the amount reported in Note 10: Ageing of T/P are different. Upon inquiry, management informed that the difference between both amounts is the intercompany T/P which is eliminated as part of consolidation Adjustment. Hence, there was no requirement to show intercompany T/P in the ageing schedule. Mr. A accepted the explanation and did not perform any further procedures to validate the explanation.

2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation of the T/P, Mr. A replied that they purely relied upon the management representation as there was no alternate procedure available to gather SAAE to validate the said information. Moreover, they informed the management that they have not qualified their audit opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the T/P ageing, Mr. A identified that management has calculated the due date of T/P from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the FS prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that:
   “The FS for the YE on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the AS notified under section 133 and are in the form provided for the company in Schedule Ill of the Act”
5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
   Key Audit Matters How our audit addressed KAM

While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
Rs. 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.

However, no such amount was outstanding as
receivable in the accounts statement shared by
intercompany. The amount was already written off
by such an intercompany in past years.

6. Other than the disputed T/P disclosed, there were claims against the company which were not yet acknowledged as debt. The aggregate amount and exposure for such claims were Rs. 25 Lakh. As per an expert hired by the management, no amount is required to be provided in BOA as in all the claims there are high chances that the decision will be in favor of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit:
   • Overall Materiality: Rs. 50 Lakh;
   • Performance Materiality: 5 Lakh;
   • Materiality for Aggregate Uncorrected Misstatement: Rs. 1 Lakh.

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

In the given situation whether Mr. A will be held guilty of professional Misconduct.

(a) Yes, Mr. A, is guilty of professional misconduct under Clause 7 of Part I of First Schedule.
(b) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of Part I of First Schedule.
(c) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of Part I of the Second Schedule.
(d) No, Mr. A is not guilty of professional misconduct as he has performed all the audit procedures appropriately.

Answer 86

(c) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of Part I of the Second Schedule.

Question 87

While preparing the FS for the YE on 31 March 2022, ABC Limited, a listed entity, provided the below information:

Excerpt of Standalone BS of ABC Ltd as of 31 March 2022
(in Rs. Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total O/s dues of micro enterprises and 300
small enterprises; and
(B) total O/s dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)

Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (Rs. in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410

Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total T/P reported in the BS as of 31 March 2022 and the amount reported in Note 10: Ageing of T/P are different. Upon inquiry, management informed that the difference between both amounts is the intercompany T/P which is eliminated as part of consolidation Adjustment. Hence, there was no requirement to show intercompany T/P in the ageing schedule. Mr. A accepted the explanation and did not perform any further procedures to validate the explanation.

2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation of the T/P, Mr. A replied that they purely relied upon the management representation as there was no alternate procedure available to gather SAAE to validate the said information. Moreover, they informed the management that they have not qualified their audit opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the T/P ageing, Mr. A identified that management has calculated the due date of T/P from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the FS prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that:
   “The FS for the YE on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the AS notified under section 133 and are in the form provided for the company in Schedule Ill of the Act”
5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
   Key Audit Matters How our audit addressed KAM

While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
Rs. 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.

However, no such amount was outstanding as
receivable in the accounts statement shared by
intercompany. The amount was already written off
by such an intercompany in past years.

6. Other than the disputed T/P disclosed, there were claims against the company which were not yet acknowledged as debt. The aggregate amount and exposure for such claims were Rs. 25 Lakh. As per an expert hired by the management, no amount is required to be provided in BOA as in all the claims there are high chances that the decision will be in favor of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit:
   • Overall Materiality: Rs. 50 Lakh;
   • Performance Materiality: 5 Lakh;
   • Materiality for Aggregate Uncorrected Misstatement: Rs. 1 Lakh.

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

Whether FS given in the scenario are in confirmation with the requirements of Division II of Schedule Ill?

(a) Yes, the FS are in confirmation with requirements mentioned in Division II of Schedule Ill

(b) No, management should have eliminated the intercompany T/P balance from the amount disclosed in the Standalone BS. This will bring Note 10: Ageing Schedule and Standalone BS in alignment.

(c) No, Management should not have disclosed the disputed T/P less than 3 years as these T/P are still under the period of limitation as per Limitation Act and they should not be disclosed in FS.

(d) No, management should have added the intercompany T/P balance to the ageing schedule. This will bring Note 10: Ageing Schedule and Standalone BS in alignment.

Answer 87

(d) No, management should have added the intercompany T/P balance to the ageing schedule. This will bring Note 10: Ageing Schedule and Standalone BS in alignment.

Question 88

While preparing the FS for the YE on 31 March 2022, ABC Limited, a listed entity, provided the below information:

Excerpt of Standalone BS of ABC Ltd as of 31 March 2022
(in Rs. Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total O/s dues of micro enterprises and 300
small enterprises; and
(B) total O/s dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)

Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (Rs. in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410

Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total T/P reported in the BS as of 31 March 2022 and the amount reported in Note 10: Ageing of T/P are different. Upon inquiry, management informed that the difference between both amounts is the intercompany T/P which is eliminated as part of consolidation Adjustment. Hence, there was no requirement to show intercompany T/P in the ageing schedule. Mr. A accepted the explanation and did not perform any further procedures to validate the explanation.

2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation of the T/P, Mr. A replied that they purely relied upon the management representation as there was no alternate procedure available to gather SAAE to validate the said information. Moreover, they informed the management that they have not qualified their audit opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the T/P ageing, Mr. A identified that management has calculated the due date of T/P from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the FS prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that:
   “The FS for the YE on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the AS notified under section 133 and are in the form provided for the company in Schedule Ill of the Act”
5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
   Key Audit Matters How our audit addressed KAM

While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
Rs. 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.

However, no such amount was outstanding as
receivable in the accounts statement shared by
intercompany. The amount was already written off
by such an intercompany in past years.

6. Other than the disputed T/P disclosed, there were claims against the company which were not yet acknowledged as debt. The aggregate amount and exposure for such claims were Rs. 25 Lakh. As per an expert hired by the management, no amount is required to be provided in BOA as in all the claims there are high chances that the decision will be in favor of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit:
   • Overall Materiality: Rs. 50 Lakh;
   • Performance Materiality: 5 Lakh;
   • Materiality for Aggregate Uncorrected Misstatement: Rs. 1 Lakh.

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

In continuation to MCQ no 12, what is an appropriate way to report the above-mentioned issues?

(a) Mr. A should have expressed a modified opinion if he was not able to gather SAAE to validate the disputed T/P. Moreover, he should have modified or issued an adverse opinion as FS were not in confirmation with requirements of Division II of Schedule Ill.

(b) Mr. A should have expressed an unmodified opinion if he was not able to gather SAAE to validate the intercompany T/P. Moreover, he should have been unmodified as FS were not in confirmation with requirements of Division II of Schedule Ill.

(c) Mr. A should have expressed an unmodified opinion as per SA 700, as he was able to obtain all the explanation and information required and sought by him. Moreover, he should have modified it as the CFS was not in confirmation with the requirements of Division II of Schedule Ill.

(d) Mr. A should have reported matters related to T/P Ageing as a qualification in Key Audit Matters, as he was not able to obtain all the explanation and information required and sought by him.

Answer 88

(a) Mr. A should have expressed a modified opinion if he was not able to gather SAAE to validate the disputed T/P. Moreover, he should have modified or issued an adverse opinion as FS were not in confirmation with requirements of Division II of Schedule Ill.

Question 89

While preparing the FS for the YE on 31 March 2022, ABC Limited, a listed entity, provided the below information:

Excerpt of Standalone BS of ABC Ltd as of 31 March 2022
(in Rs. Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total O/s dues of micro enterprises and 300
small enterprises; and
(B) total O/s dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)

Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (Rs. in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410

Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total T/P reported in the BS as of 31 March 2022 and the amount reported in Note 10: Ageing of T/P are different. Upon inquiry, management informed that the difference between both amounts is the intercompany T/P which is eliminated as part of consolidation Adjustment. Hence, there was no requirement to show intercompany T/P in the ageing schedule. Mr. A accepted the explanation and did not perform any further procedures to validate the explanation.

2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation of the T/P, Mr. A replied that they purely relied upon the management representation as there was no alternate procedure available to gather SAAE to validate the said information. Moreover, they informed the management that they have not qualified their audit opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the T/P ageing, Mr. A identified that management has calculated the due date of T/P from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the FS prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that:
   “The FS for the YE on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the AS notified under section 133 and are in the form provided for the company in Schedule Ill of the Act”
5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
   Key Audit Matters How our audit addressed KAM

While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
Rs. 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.

However, no such amount was outstanding as
receivable in the accounts statement shared by
intercompany. The amount was already written off
by such an intercompany in past years.

6. Other than the disputed T/P disclosed, there were claims against the company which were not yet acknowledged as debt. The aggregate amount and exposure for such claims were Rs. 25 Lakh. As per an expert hired by the management, no amount is required to be provided in BOA as in all the claims there are high chances that the decision will be in favor of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit:
   • Overall Materiality: Rs. 50 Lakh;
   • Performance Materiality: 5 Lakh;
   • Materiality for Aggregate Uncorrected Misstatement: Rs. 1 Lakh.

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

Whether the reporting performed by Mr. A related to intercompany trade payables under the paragraph/section of Key Audit Matter in the audit report appropriate? Select from the below option to support your answer.

(a) Mr. A should have expressed an unmodified opinion if he was not able to gather SAAE to validate the disputed intercompany T/P. As per SA 701, those matters that, in the auditor’s professional judgment, were of most significance in the audit of the FS of the current period are Key Audit Matters. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.

(b) Mr. A should have expressed a modified opinion if he was not able to gather SAAE to validate the disputed intercompany T/P. As per SA 701 , those matters that, in the auditor’s professional judgment, were of most significance in the audit of the FS of the current period are Key Audit Matters. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.

(c) Mr. A should have expressed an unmodified opinion if he was not able to gather SAAE to validate the disputed intercompany T/P. As per SA 701, the auditor shall report the matter in Key Audit Matters in the auditor’s report when the auditor concludes that, based on the audit evidence obtained, the FS as a whole are not free from material misstatement or the auditor is unable to obtain SAAE to conclude that the FS as a whole are free from material misstatement.

(d) The auditor shall express an adverse opinion and report the said matter in Key Audit Matter Para when the auditor, having obtained SAAE, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the FS. In the current case, the auditor has appropriately disclosed the said matter in Key Audit Matter Paragraph.

Answer 89

(b) Mr. A should have expressed a modified opinion if he was not able to gather SAAE to validate the disputed intercompany T/P. As per SA 701 , those matters that, in the auditor’s professional judgment, were of most significance in the audit of the FS of the current period are Key Audit Matters. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.

Question 90

While preparing the FS for the YE on 31 March 2022, ABC Limited, a listed entity, provided the below information:

Excerpt of Standalone BS of ABC Ltd as of 31 March 2022
(in Rs. Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total O/s dues of micro enterprises and 300
small enterprises; and
(B) total O/s dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)

Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (Rs. in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410

Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total T/P reported in the BS as of 31 March 2022 and the amount reported in Note 10: Ageing of T/P are different. Upon inquiry, management informed that the difference between both amounts is the intercompany T/P which is eliminated as part of consolidation Adjustment. Hence, there was no requirement to show intercompany T/P in the ageing schedule. Mr. A accepted the explanation and did not perform any further procedures to validate the explanation.

2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation of the T/P, Mr. A replied that they purely relied upon the management representation as there was no alternate procedure available to gather SAAE to validate the said information. Moreover, they informed the management that they have not qualified their audit opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the T/P ageing, Mr. A identified that management has calculated the due date of T/P from the end of 180 days from the date of transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the FS prepared for the period ending on 31 March 2022 on any grounds. Also, Mr. A specified that:
   “The FS for the YE on 31 March 2022 give a true and fair view of the state of affairs of the company, comply with the AS notified under section 133 and are in the form provided for the company in Schedule Ill of the Act”
5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
   Key Audit Matters How our audit addressed KAM

While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
Rs. 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.

However, no such amount was outstanding as
receivable in the accounts statement shared by
intercompany. The amount was already written off
by such an intercompany in past years.

6. Other than the disputed T/P disclosed, there were claims against the company which were not yet acknowledged as debt. The aggregate amount and exposure for such claims were Rs. 25 Lakh. As per an expert hired by the management, no amount is required to be provided in BOA as in all the claims there are high chances that the decision will be in favor of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit:
   • Overall Materiality: Rs. 50 Lakh;
   • Performance Materiality: 5 Lakh;
   • Materiality for Aggregate Uncorrected Misstatement: Rs. 1 Lakh.

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

As per the expert appointed by the Auditor, the exposure for the company can be Rs. 20 lacs as in past in similar cases, the judgement was delivered against the company. However, the management of ABC Limited was of the view that when management has already hired an expert, then there is no need to hire another expert by the auditor. Seeking your advice, kindly guide the auditor by selecting the below option, and what next steps should perform.

(a) The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a ROMM. Also, if expertise in a field other than accounting or auditing is necessary to obtain SAAE, the auditor shall determine whether to use the work of an auditor’s expert. Hence auditor can appoint his expert to validate the assumption and estimate performed by the management’s expert.

(b) The auditor shall rely upon the work performed by the management’s expert. Management expert will be equivalent to the auditor’s expert and hence no other expert is required to be appointed.

(c) The auditor shall not rely upon the management’s expert unless he evaluates the adequacy of the expert’s work for the auditor’s purposes, including the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence. Although in the current case, there is no consonance between the management’s expert’s findings and other audit evidence, the auditor is still required to rely upon the findings of the management’s expert.

(d) The auditor shall rely upon the management’s expert without evaluating the adequacy of the expert’s work for the auditor’s purposes, including the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence. Hence auditor is required to rely upon the findings of management’s expert in the current case.

Answer 90

(a) The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a ROMM. Also, if expertise in a field other than accounting or auditing is necessary to obtain SAAE, the auditor shall determine whether to use the work of an auditor’s expert. Hence auditor can appoint his expert to validate the assumption and estimate performed by the management’s expert.

Question 91

Mr. K is a practicing-CA and also member of CPA Ireland. He handles only GST related work and tax audits for clients. Currently, he is having 19 companies for which he is handling the tax audit. At the beginning of the current FY, he was approached by 40 new clients for tax audit assignments. He was reluctant to accept all the work as he feared breaching the permissible limit of handling clients. After consulting several friends of his, he finally decided to accept the work of just 2 big clients who approached him.

Mr. J, (K’s friend) a CA in practice and a member empaneled as IP was acting as the statutory auditor for a listed entity. The audit for the current FY was completed but there was some difference of opinion between auditor and the management. As a result of this, the company did not send the notice for AGM to Mr. J. When enquired, it was said that the company is not obliged to send notices to the auditor and it’s the responsibility of the auditor to be aware of the AGM. Having heard this, Mr. J went to his friend to clarify the above matter. As a result of this incident, the management had not paid a part of the agreed audit fees to Mr. J. In retaliation, Mr. J took lien over few documents pertaining to the company. Having come to know about this, Mr. K immediately informed his friend that his act would lead to professional misconduct.

Mr. K & his friend Mr. J decided to start a partnership firm. They completed all formalities and went ahead and printed their visiting card as follows:

   M/s KJ & Associates                                                       M/s KJ & Associates

Mr. K, Chartered Accountant, Mr. J, Chartered Accountant,
CPA Ireland Insolvency Professional
Partner Partner

No.3, MMM Street, Delhi No.3, MMM Street, Delhi
Phone: 9xxxxxxxx0 Phone: 9xxxxxxxx0

The firm had also received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settler of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

On the basis of the abovementioned facts, you are required to choose the most appropriate answer for the following MCQs:

In the given case scenario, has Mr. K breached the maximum limit of clients. If yes, can he be held guilty of professional misconduct?

(a) Yes. The ceiling on number of tax audits which can be accepted by a CA is 20. In this given case, Mr. K is already having 19 clients and has now accepted 2 more (19+2=21). Also, he shall be held guilty of professional misconduct as per the CA Act, 1949.

(b) Yes. The ceiling on number of tax audits which can be accepted by a CA is 20. In this given case, Mr. K is already having 19 clients and has now accepted 2 more (19+2=21). However, this shall not be considered as guilty of professional misconduct as per the CA Act, 1949.

(c) No. In the above case, the maximum ceiling is 25 in number (as per the latest decision taken by the ICAI council). The assignments (existing + new) handled by Mr. K is well below the prescribed limit and hence there is no breach.

(d) No. In the above case, the maximum ceiling is 60 in number. The assignments (existing+ new) handled by Mr. K is well below the prescribed limit and hence there is no breach.

Answer 91

(d) No. In the above case, the maximum ceiling is 60 in number. The assignments (existing+ new) handled by Mr. K is well below the prescribed limit and hence there is no breach.

Question 92

Mr. K is a practicing-CA and also member of CPA Ireland. He handles only GST related work and tax audits for clients. Currently, he is having 19 companies for which he is handling the tax audit. At the beginning of the current FY, he was approached by 40 new clients for tax audit assignments. He was reluctant to accept all the work as he feared breaching the permissible limit of handling clients. After consulting several friends of his, he finally decided to accept the work of just 2 big clients who approached him.

Mr. J, (K’s friend) a CA in practice and a member empaneled as IP was acting as the statutory auditor for a listed entity. The audit for the current FY was completed but there was some difference of opinion between auditor and the management. As a result of this, the company did not send the notice for AGM to Mr. J. When enquired, it was said that the company is not obliged to send notices to the auditor and it’s the responsibility of the auditor to be aware of the AGM. Having heard this, Mr. J went to his friend to clarify the above matter. As a result of this incident, the management had not paid a part of the agreed audit fees to Mr. J. In retaliation, Mr. J took lien over few documents pertaining to the company. Having come to know about this, Mr. K immediately informed his friend that his act would lead to professional misconduct.

Mr. K & his friend Mr. J decided to start a partnership firm. They completed all formalities and went ahead and printed their visiting card as follows:

   M/s KJ & Associates                                                       M/s KJ & Associates

Mr. K, Chartered Accountant, Mr. J, Chartered Accountant,
CPA Ireland Insolvency Professional
Partner Partner

No.3, MMM Street, Delhi No.3, MMM Street, Delhi
Phone: 9xxxxxxxx0 Phone: 9xxxxxxxx0

The firm had also received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settler of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

On the basis of the abovementioned facts, you are required to choose the most appropriate answer for the following MCQs:

Assuming yourself to be Mr. K, what would be your advice to Mr. J on the above matter?

(a) The company has not followed the provisions of section 146 of Companies Act, 2013. All notices of, and other communications relating to, any GM shall be forwarded to the auditor of the company. Also, as per section 147, the company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5 lakh.

(b) The company has not followed the provisions of section 146 of Companies Act, 2013. All notices of, and other communications relating to, any GM shall be forwarded to the auditor of the company. Also, as per section 147, the company shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs. 1 lakh.

(c) The company has not followed the provisions of section 147 of Companies Act, 2013. All notices of, and other communications relating to, any GM shall be forwarded to the auditor of the company. However, the company shall not be punishable for this act.

(d) The argument of the management is right. The Companies Act, 2013 does not mandate that the company shall send the notices for its general meetings to the auditor. It is the responsibility of the auditor (in this case Mr. J) to attend the AGM irrespective of getting the notice for it or not. The auditor shall be punishable under the provisions of the Act if he doesn’t not attend the AGM.

Answer 92

(a) The company has not followed the provisions of section 146 of Companies Act, 2013. All notices of, and other communications relating to, any GM shall be forwarded to the auditor of the company. Also, as per section 147, the company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5 lakh.

Question 93

Mr. K is a practicing-CA and also member of CPA Ireland. He handles only GST related work and tax audits for clients. Currently, he is having 19 companies for which he is handling the tax audit. At the beginning of the current FY, he was approached by 40 new clients for tax audit assignments. He was reluctant to accept all the work as he feared breaching the permissible limit of handling clients. After consulting several friends of his, he finally decided to accept the work of just 2 big clients who approached him.

Mr. J, (K’s friend) a CA in practice and a member empaneled as IP was acting as the statutory auditor for a listed entity. The audit for the current FY was completed but there was some difference of opinion between auditor and the management. As a result of this, the company did not send the notice for AGM to Mr. J. When enquired, it was said that the company is not obliged to send notices to the auditor and it’s the responsibility of the auditor to be aware of the AGM. Having heard this, Mr. J went to his friend to clarify the above matter. As a result of this incident, the management had not paid a part of the agreed audit fees to Mr. J. In retaliation, Mr. J took lien over few documents pertaining to the company. Having come to know about this, Mr. K immediately informed his friend that his act would lead to professional misconduct.

Mr. K & his friend Mr. J decided to start a partnership firm. They completed all formalities and went ahead and printed their visiting card as follows:

   M/s KJ & Associates                                                       M/s KJ & Associates

Mr. K, Chartered Accountant, Mr. J, Chartered Accountant,
CPA Ireland Insolvency Professional
Partner Partner

No.3, MMM Street, Delhi No.3, MMM Street, Delhi
Phone: 9xxxxxxxx0 Phone: 9xxxxxxxx0

The firm had also received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settler of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

On the basis of the abovementioned facts, you are required to choose the most appropriate answer for the following MCQs:

Will the retaliating act of Mr. J against the company make him guilty of professional misconduct?

(a) No. The above act will not lead to professional misconduct. However, under section 147 of the Companies Act, 2013, Mr. J shall be punishable for exercising lien over the company’s documents.

(b) No. The CA Act, 1949 is silent about the above situation and hence it will not lead to professional misconduct.

(c) Yes. As per the recent decision of ESB, a CA cannot exercise lien over client documents/ records for non-payment of his fees.

(d) Yes. As per Clause 7 of Part I of Second Schedule of CA Act, 1949, the above act of Mr. J will make him guilty of professional misconduct.

Answer 93

(c) Yes. As per the recent decision of ESB, a CA cannot exercise lien over client documents/ records for non-payment of his fees.

Question 94

Mr. K is a practicing-CA and also member of CPA Ireland. He handles only GST related work and tax audits for clients. Currently, he is having 19 companies for which he is handling the tax audit. At the beginning of the current FY, he was approached by 40 new clients for tax audit assignments. He was reluctant to accept all the work as he feared breaching the permissible limit of handling clients. After consulting several friends of his, he finally decided to accept the work of just 2 big clients who approached him.

Mr. J, (K’s friend) a CA in practice and a member empaneled as IP was acting as the statutory auditor for a listed entity. The audit for the current FY was completed but there was some difference of opinion between auditor and the management. As a result of this, the company did not send the notice for AGM to Mr. J. When enquired, it was said that the company is not obliged to send notices to the auditor and it’s the responsibility of the auditor to be aware of the AGM. Having heard this, Mr. J went to his friend to clarify the above matter. As a result of this incident, the management had not paid a part of the agreed audit fees to Mr. J. In retaliation, Mr. J took lien over few documents pertaining to the company. Having come to know about this, Mr. K immediately informed his friend that his act would lead to professional misconduct.

Mr. K & his friend Mr. J decided to start a partnership firm. They completed all formalities and went ahead and printed their visiting card as follows:

   M/s KJ & Associates                                                       M/s KJ & Associates

Mr. K, Chartered Accountant, Mr. J, Chartered Accountant,
CPA Ireland Insolvency Professional
Partner Partner

No.3, MMM Street, Delhi No.3, MMM Street, Delhi
Phone: 9xxxxxxxx0 Phone: 9xxxxxxxx0

The firm had also received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settler of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

On the basis of the abovementioned facts, you are required to choose the most appropriate answer for the following MCQs:

In the given case scenario, visiting cards printed by Mr. K & Mr. J, is there anything which may lead to professional misconduct? If so, under what provisions?

(a) Mentioning ‘CPA Ireland’ & the term ‘IP’ by Mr. K & Mr. J respectively violates the provisions of clause 7 of part I of First schedule of the CA Act, 1949. Hence, both of them shall be held guilty of professional misconduct.

(b) There is no information contained in both the visiting cards, which leads to professional misconduct. All details mentioned are abiding the provisions of clause 7 of part I of First schedule of the CA Act, 1949.

(c) Mentioning ‘CPA Ireland’ by Mr. K violates the provisions of clause 6 & clause 7 of part I of First schedule of the Chartered Accountants Act, 1949. Hence, Mr. K shall be held guilty of professional misconduct. However, as far as Mr. J’s card is concerned, nothing mentioned in it is against the provision of CA Act, 1949, so he shall not be held guilty of professional misconduct.

(d) Mentioning the term ‘IP by Mr. J violates the provisions of clause 7 of part I of First schedule of the Chartered Accountants Act, 1949. Hence, he shall be held guilty of professional misconduct. However, as far as Mr. K’s card is concerned, nothing mentioned in it is against the provision of CA Act, 1949, so he shall not be held guilty of professional misconduct

Answer 94

(b) There is no information contained in both the visiting cards, which leads to professional misconduct. All details mentioned are abiding the provisions of clause 7 of part I of First schedule of the CA Act, 1949.

Question 95

Mr. K is a practicing-CA and also member of CPA Ireland. He handles only GST related work and tax audits for clients. Currently, he is having 19 companies for which he is handling the tax audit. At the beginning of the current FY, he was approached by 40 new clients for tax audit assignments. He was reluctant to accept all the work as he feared breaching the permissible limit of handling clients. After consulting several friends of his, he finally decided to accept the work of just 2 big clients who approached him.

Mr. J, (K’s friend) a CA in practice and a member empaneled as IP was acting as the statutory auditor for a listed entity. The audit for the current FY was completed but there was some difference of opinion between auditor and the management. As a result of this, the company did not send the notice for AGM to Mr. J. When enquired, it was said that the company is not obliged to send notices to the auditor and it’s the responsibility of the auditor to be aware of the AGM. Having heard this, Mr. J went to his friend to clarify the above matter. As a result of this incident, the management had not paid a part of the agreed audit fees to Mr. J. In retaliation, Mr. J took lien over few documents pertaining to the company. Having come to know about this, Mr. K immediately informed his friend that his act would lead to professional misconduct.

Mr. K & his friend Mr. J decided to start a partnership firm. They completed all formalities and went ahead and printed their visiting card as follows:

   M/s KJ & Associates                                                       M/s KJ & Associates

Mr. K, Chartered Accountant, Mr. J, Chartered Accountant,
CPA Ireland Insolvency Professional
Partner Partner

No.3, MMM Street, Delhi No.3, MMM Street, Delhi
Phone: 9xxxxxxxx0 Phone: 9xxxxxxxx0

The firm had also received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settler of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

On the basis of the abovementioned facts, you are required to choose the most appropriate answer for the following MCQs:

The firm had received the following assignments:

(i) Concurrent audit for T Bank Ltd.
(ii) Statutory audit for BBT Bank Ltd. (it is to be noted that the bank was not sponsored by T Bank)
(iii) Offer to act as settlor of ZZ Charitable Trust.
(iv) Internal audit of PF Trust of Government Company Ltd.
(v) Statutory Auditor of Government Company Ltd.

Among the above assignments, which assignments can be accepted by the firm?

(a) Either (i) or (ii), (iii) & Either (iv) or (v)
(b) (i), (ii), (iii) & Either (iv) or (v)
(c) Either (i) or (ii) & Either (iv) or (v)
(d) (ii) only

Answer 95

(b) (i), (ii), (iii) & Either (iv) or (v)

Question 96

Mr. B one of the partners of the firm is facing a dilemma as to whether the firm BMY LLP should accept the appointment as Statutory Auditors of M/s F Limited wherein Mr. B had sent a communication in writing addressed to the outgoing auditor Mr. D under certificate of posting and the outgoing auditor has sent an acknowledgement vide their official email, but this email address of the outgoing auditor is not registered with the Institute of CA of India. Mr. B is of the opinion that this is not positive evidence of delivery and violates the provisions of Code of Ethics if the firm accepts the audit assignment.

With respect to the dilemma being faced by Mr. B, partner of the firm regarding acknowledgment of the communication from the retiring auditor’s vide their official email is not positive evidence of delivery?

(a) The dilemma of Mr. B is correct as it is not positive evidence of delivery.

(b) The dilemma of Mr. B is not correct as it is positive evidence of delivery as the same is received from the official email of the outgoing auditor, as per the Code of Ethics.

(c) The dilemma of Mr. B is not correct as statutory auditors are not required to communicate with the retiring or outgoing auditors in this case.

(d) The dilemma of Mr. B is correct as the email address of the outgoing auditor from which acknowledgement has come is not registered with the ICAI.

Answer 96

(b) The dilemma of Mr. B is not correct as it is positive evidence of delivery as the same is received from the official email of the outgoing auditor, as per the Code of Ethics.

Question 97

CA Z is appointed as a Statutory Auditor of JB Finance Limited (a NBFC covered under NBFC - Systematically important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016) for the year 2021-22. Following information is available with CA Z with respect to JB Finance Limited as at 31 March, 2022:

Particulars Rs. (in Lakh)
Standard Assets 700.00
Sub-standard Assets 200.00
Doubtful Assets (Secured and up-to one year) 10.00
Doubtful Assets (Secured and more than three years) 50.00

What will be the total provision required to be made in the books of JB Finance Limited for the YE 31 March, 2022 for the above stated Assets?

(a) Rs. 49.8 Lakh
(b) Rs. 47 Lakh
(c) Rs. 34.8 Lakh
(d) Rs. 52.8 Lakh

Answer 97

(a) Rs. 49.8 Lakh

Question 98

While auditing with respect to compliance with CARO, 2020, Mr. O, for additional reporting purpose, observed the following, relevant to Para 3(vii) of CARO, 2020:

Statutory Dues Undisputed Amount Date Payable Date Paid
(Rs. in lakh)
Provident Fund 1.5 24th September, 2021 27th March, 2022
GST 2.45 23rd October, 2021 24th April, 2022
Customs Duty 0.65 20th September, 2021 10th April, 2022
Income Tax Demand for 0.55 18th October, 2021 Not Paid till date
A.Y. 2019-20

Also, a representation was made to GST Department for waiving a penalty of Rs. 1 lakh for late payment of GST demand. What total amount of statutory dues need to be reported by Mr. O as per Para 3 of CARO?

(a) Rs. 3.10 lakh.
(b} Rs. 0.65 lakh.
(c} Rs. 3.65 lakh.
(d} Rs. 2.70 lakh.

Answer 98

(b} Rs. 0.65 lakh.

Question 99

With respect to audit of PSU, which among the below is related to propriety audit?

(a) This audit is carried out by assessing whether activities, financial transactions and information comply in all material aspects, with the regulatory and other authorities which govern the audited entity.

(b) This auditing focuses on the areas in which it can add value which have the greatest potential for development. It provides constructive incentives for the responsible parties to take appropriate action.

(c) It is an audit under which the C&AG does not really cover again the field which has already been covered. He conducts an appraisal or an efficiency cum performance audit.

(d) It stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct. This audit is directed towards an examination of managements decisions in sales, purchases, contracts, etc.

Answer 99

(d) It stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct. This audit is directed towards an examination of managements decisions in sales, purchases, contracts, etc.

Question 100

In case of peer review, which among the following the reviewer shall cover?

(a) Compliance with legal regulations governing the firm.

(b) Check whether the qualification of the articled assistants and other staffs are sufficient to be employed.

(c) Compliance with tax regulations of the firm, which includes filing IT return of the firm, payment of tax, etc.

(d) Training program for staff concerned with assurance function, including availability of infrastructure.

Answer 100

(d) Training program for staff concerned with assurance function, including availability of infrastructure.

Question 101

A SR was passed by D Ltd, an unlisted public company, for the purpose of conducting investigation into the affairs of the company by getting order of the CG for the same.

The CG on receipt of such application from D Ltd supported by a copy of SR did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter, certain specified number of members of D Ltd made an application to the Tribunal for seeking investigation and the Tribunal upon being satisfied that such investigation was required, passed an order which was forwarded to the CG.

On receipt of such order from the Tribunal, the CG passed an order for investigation into the affairs of D Ltd, by appointing Mr. R as an inspector for the same, who is practicing as a CA in partnership firm named RS & Co.

Mr. R started with the investigation into the affairs of D Ltd from 03.04.2021. All books and papers of D Ltd were handed over
to Mr. R from 04.04.2021. During the investigation, Mr. R considered it necessary to examine the books and papers of B (P) Ltd., a supplier company of D Ltd while investigating on a particular matter relating to purchases of D Ltd. Accordingly, Mr. R obtained the same through an officer of D Ltd on 20.04.2021. Such books and papers of B (P) Ltd. were returned by Mr. R on 05.06.2021 but he again obtained the same on 20.06.2021 by an order in writing, due to certain reasons which were returned on 25.08.2021.

Mr. R, at the later stage of investigation, also initiated investigated into the affairs of S Ltd., an unlisted public company, which was being managed 2 years ago by an ex-manager of D Ltd., Mr. J, as he considered it necessary to do so, after obtaining required approvals.

Mr. R examined on oath by summoning and enforcing attendance of following persons: -
• Mr. J
• Mr. U, a director of D Ltd.
• Mr. S, an employee of S Ltd.
• Mr. M, an employee of B (P) Ltd.

The investigation, in case of the aforesaid companies i.e. D Ltd. and S Ltd. was concluded by Mr. R but he only forwarded the
report of the results of investigation of D Ltd., after authentication, to the CG.

On perusal of such investigation report of D Ltd., the CG observed that revenue of D Ltd. was misrepresented during FY 2019-20 as they were booking fictitious sales in anticipation of actual sales and thus, it concluded that the affairs of the company were mismanaged during the FY 2019-20 which casted a doubt on the reliability of FS for the said FY and because of which it made an application to the Tribunal for the purpose of re-opening books of account of D Ltd. and recasting its FS.

The tribunal passed an order on 12.01.2022 for re-opening books of account of D Ltd. and recasting its FS for FY 2019-20 on the basis of aforesaid reason, after giving notice to the CG for the same and taking into consideration the representations made by it in this regard.

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

Whether it was justifiable on the part of the CG to reject the application of D Ltd. even though it was supported by a copy of SR and whether RS & Co. could have been appointed as inspector instead of Mr. R, in order to have more manpower for the investigation?

(a) Yes, as the CG possesses discretion to reject the application received from any person if it does not deem fit for investigation and RS & Co. was eligible to be appointed as inspector.

(b) No, the CG should have accepted the application as necessary formalities were complied with by D Ltd. and RS & Co. was ineligible to be appointed as inspector.

(c) Yes, as the CG possesses discretion to reject such an application and RS & Co. was eligible to be appointed as an inspector provided it had minimum 3 partners.

(d) Yes, as the CG possesses discretion to reject such an application and RS & Co. was ineligible to be appointed as inspector.

Answer 101

(d) Yes, as the CG possesses discretion to reject such an application and RS & Co. was ineligible to be appointed as inspector.

Question 102

A SR was passed by D Ltd, an unlisted public company, for the purpose of conducting investigation into the affairs of the company by getting order of the CG for the same.

The CG on receipt of such application from D Ltd supported by a copy of SR did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter, certain specified number of members of D Ltd made an application to the Tribunal for seeking investigation and the Tribunal upon being satisfied that such investigation was required, passed an order which was forwarded to the CG.

On receipt of such order from the Tribunal, the CG passed an order for investigation into the affairs of D Ltd, by appointing Mr. R as an inspector for the same, who is practicing as a CA in partnership firm named RS & Co.

Mr. R started with the investigation into the affairs of D Ltd from 03.04.2021. All books and papers of D Ltd were handed over
to Mr. R from 04.04.2021. During the investigation, Mr. R considered it necessary to examine the books and papers of B (P) Ltd., a supplier company of D Ltd while investigating on a particular matter relating to purchases of D Ltd. Accordingly, Mr. R obtained the same through an officer of D Ltd on 20.04.2021. Such books and papers of B (P) Ltd. were returned by Mr. R on 05.06.2021 but he again obtained the same on 20.06.2021 by an order in writing, due to certain reasons which were returned on 25.08.2021.

Mr. R, at the later stage of investigation, also initiated investigated into the affairs of S Ltd., an unlisted public company, which was being managed 2 years ago by an ex-manager of D Ltd., Mr. J, as he considered it necessary to do so, after obtaining required approvals.

Mr. R examined on oath by summoning and enforcing attendance of following persons: -
• Mr. J
• Mr. U, a director of D Ltd.
• Mr. S, an employee of S Ltd.
• Mr. M, an employee of B (P) Ltd.

The investigation, in case of the aforesaid companies i.e. D Ltd. and S Ltd. was concluded by Mr. R but he only forwarded the
report of the results of investigation of D Ltd., after authentication, to the CG.

On perusal of such investigation report of D Ltd., the CG observed that revenue of D Ltd. was misrepresented during FY 2019-20 as they were booking fictitious sales in anticipation of actual sales and thus, it concluded that the affairs of the company were mismanaged during the FY 2019-20 which casted a doubt on the reliability of FS for the said FY and because of which it made an application to the Tribunal for the purpose of re-opening books of account of D Ltd. and recasting its FS.

The tribunal passed an order on 12.01.2022 for re-opening books of account of D Ltd. and recasting its FS for FY 2019-20 on the basis of aforesaid reason, after giving notice to the CG for the same and taking into consideration the representations made by it in this regard.

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

Till what time period, Mr. R was having the authority to keep in his custody, the books and papers of D Ltd and B (P) Ltd which were obtained again?

(a) 01.10.2021 & 03.12.2021, respectively
(b) 03.07.2021 & 03.12.2021, respectively
(c) 01.10.2021 & 17.12.2021, respectively
(d) 03.06.2021 & 02.12.2021, respectively

Answer 102

(c) 01.10.2021 & 17.12.2021, respectively

Question 103

A SR was passed by D Ltd, an unlisted public company, for the purpose of conducting investigation into the affairs of the company by getting order of the CG for the same.

The CG on receipt of such application from D Ltd supported by a copy of SR did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter, certain specified number of members of D Ltd made an application to the Tribunal for seeking investigation and the Tribunal upon being satisfied that such investigation was required, passed an order which was forwarded to the CG.

On receipt of such order from the Tribunal, the CG passed an order for investigation into the affairs of D Ltd, by appointing Mr. R as an inspector for the same, who is practicing as a CA in partnership firm named RS & Co.

Mr. R started with the investigation into the affairs of D Ltd from 03.04.2021. All books and papers of D Ltd were handed over
to Mr. R from 04.04.2021. During the investigation, Mr. R considered it necessary to examine the books and papers of B (P) Ltd., a supplier company of D Ltd while investigating on a particular matter relating to purchases of D Ltd. Accordingly, Mr. R obtained the same through an officer of D Ltd on 20.04.2021. Such books and papers of B (P) Ltd. were returned by Mr. R on 05.06.2021 but he again obtained the same on 20.06.2021 by an order in writing, due to certain reasons which were returned on 25.08.2021.

Mr. R, at the later stage of investigation, also initiated investigated into the affairs of S Ltd., an unlisted public company, which was being managed 2 years ago by an ex-manager of D Ltd., Mr. J, as he considered it necessary to do so, after obtaining required approvals.

Mr. R examined on oath by summoning and enforcing attendance of following persons: -
• Mr. J
• Mr. U, a director of D Ltd.
• Mr. S, an employee of S Ltd.
• Mr. M, an employee of B (P) Ltd.

The investigation, in case of the aforesaid companies i.e. D Ltd. and S Ltd. was concluded by Mr. R but he only forwarded the
report of the results of investigation of D Ltd., after authentication, to the CG.

On perusal of such investigation report of D Ltd., the CG observed that revenue of D Ltd. was misrepresented during FY 2019-20 as they were booking fictitious sales in anticipation of actual sales and thus, it concluded that the affairs of the company were mismanaged during the FY 2019-20 which casted a doubt on the reliability of FS for the said FY and because of which it made an application to the Tribunal for the purpose of re-opening books of account of D Ltd. and recasting its FS.

The tribunal passed an order on 12.01.2022 for re-opening books of account of D Ltd. and recasting its FS for FY 2019-20 on the basis of aforesaid reason, after giving notice to the CG for the same and taking into consideration the representations made by it in this regard.

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

For which of the following person(s), Mr. R was required to obtain prior approval of CG for examining them on oath by summoning and enforcing their attendance?

(a) Mr. J, Mr. S and Mr. M, respectively
(b) Mr. S and Mr. M, respectively
(c) Mr. S
(d) Mr. R

Answer 103

(d) Mr. R

Question 104

A SR was passed by D Ltd, an unlisted public company, for the purpose of conducting investigation into the affairs of the company by getting order of the CG for the same.

The CG on receipt of such application from D Ltd supported by a copy of SR did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter, certain specified number of members of D Ltd made an application to the Tribunal for seeking investigation and the Tribunal upon being satisfied that such investigation was required, passed an order which was forwarded to the CG.

On receipt of such order from the Tribunal, the CG passed an order for investigation into the affairs of D Ltd, by appointing Mr. R as an inspector for the same, who is practicing as a CA in partnership firm named RS & Co.

Mr. R started with the investigation into the affairs of D Ltd from 03.04.2021. All books and papers of D Ltd were handed over
to Mr. R from 04.04.2021. During the investigation, Mr. R considered it necessary to examine the books and papers of B (P) Ltd., a supplier company of D Ltd while investigating on a particular matter relating to purchases of D Ltd. Accordingly, Mr. R obtained the same through an officer of D Ltd on 20.04.2021. Such books and papers of B (P) Ltd. were returned by Mr. R on 05.06.2021 but he again obtained the same on 20.06.2021 by an order in writing, due to certain reasons which were returned on 25.08.2021.

Mr. R, at the later stage of investigation, also initiated investigated into the affairs of S Ltd., an unlisted public company, which was being managed 2 years ago by an ex-manager of D Ltd., Mr. J, as he considered it necessary to do so, after obtaining required approvals.

Mr. R examined on oath by summoning and enforcing attendance of following persons: -
• Mr. J
• Mr. U, a director of D Ltd.
• Mr. S, an employee of S Ltd.
• Mr. M, an employee of B (P) Ltd.

The investigation, in case of the aforesaid companies i.e. D Ltd. and S Ltd. was concluded by Mr. R but he only forwarded the
report of the results of investigation of D Ltd., after authentication, to the CG.

On perusal of such investigation report of D Ltd., the CG observed that revenue of D Ltd. was misrepresented during FY 2019-20 as they were booking fictitious sales in anticipation of actual sales and thus, it concluded that the affairs of the company were mismanaged during the FY 2019-20 which casted a doubt on the reliability of FS for the said FY and because of which it made an application to the Tribunal for the purpose of re-opening books of account of D Ltd. and recasting its FS.

The tribunal passed an order on 12.01.2022 for re-opening books of account of D Ltd. and recasting its FS for FY 2019-20 on the basis of aforesaid reason, after giving notice to the CG for the same and taking into consideration the representations made by it in this regard.

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

Whether it was justifiable on the part of Mr. R for not forwarding the investigation report of S Ltd. to the CG and what type of fraud had been identified by the CG on perusal of investigation report of D Ltd.?

(a) Yes, provided reasons for not forwarding the same are recorded in writing by Mr. R and the type of fraud identified is in the nature of ‘Teeming and Lading’, respectively.

(b) No, as it is the responsibility of the inspector to forward to the CG, the results of investigation of all the companies done by him and the type of fraud identified is in the nature of ‘Tampering of receipts’, respectively.

(c) No, because at the first place, Mr. R was not only having the authority to investigate into the affairs of S Ltd. and the type of fraud identified is in the nature of ‘Teeming and Lading’, respectively.

(d) Yes, if according to Mr. R such report was not relevant to the investigation of affairs of D Ltd. and the type of fraud identified is in the nature of ‘Advance billing’, respectively.

Answer 104

(d) Yes, if according to Mr. R such report was not relevant to the investigation of affairs of D Ltd. and the type of fraud identified is in the nature of ‘Advance billing’, respectively.

Question 105

A SR was passed by D Ltd, an unlisted public company, for the purpose of conducting investigation into the affairs of the company by getting order of the CG for the same.

The CG on receipt of such application from D Ltd supported by a copy of SR did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter, certain specified number of members of D Ltd made an application to the Tribunal for seeking investigation and the Tribunal upon being satisfied that such investigation was required, passed an order which was forwarded to the CG.

On receipt of such order from the Tribunal, the CG passed an order for investigation into the affairs of D Ltd, by appointing Mr. R as an inspector for the same, who is practicing as a CA in partnership firm named RS & Co.

Mr. R started with the investigation into the affairs of D Ltd from 03.04.2021. All books and papers of D Ltd were handed over
to Mr. R from 04.04.2021. During the investigation, Mr. R considered it necessary to examine the books and papers of B (P) Ltd., a supplier company of D Ltd while investigating on a particular matter relating to purchases of D Ltd. Accordingly, Mr. R obtained the same through an officer of D Ltd on 20.04.2021. Such books and papers of B (P) Ltd. were returned by Mr. R on 05.06.2021 but he again obtained the same on 20.06.2021 by an order in writing, due to certain reasons which were returned on 25.08.2021.

Mr. R, at the later stage of investigation, also initiated investigated into the affairs of S Ltd., an unlisted public company, which was being managed 2 years ago by an ex-manager of D Ltd., Mr. J, as he considered it necessary to do so, after obtaining required approvals.

Mr. R examined on oath by summoning and enforcing attendance of following persons: -
• Mr. J
• Mr. U, a director of D Ltd.
• Mr. S, an employee of S Ltd.
• Mr. M, an employee of B (P) Ltd.

The investigation, in case of the aforesaid companies i.e. D Ltd. and S Ltd. was concluded by Mr. R but he only forwarded the
report of the results of investigation of D Ltd., after authentication, to the CG.

On perusal of such investigation report of D Ltd., the CG observed that revenue of D Ltd. was misrepresented during FY 2019-20 as they were booking fictitious sales in anticipation of actual sales and thus, it concluded that the affairs of the company were mismanaged during the FY 2019-20 which casted a doubt on the reliability of FS for the said FY and because of which it made an application to the Tribunal for the purpose of re-opening books of account of D Ltd. and recasting its FS.

The tribunal passed an order on 12.01.2022 for re-opening books of account of D Ltd. and recasting its FS for FY 2019-20 on the basis of aforesaid reason, after giving notice to the CG for the same and taking into consideration the representations made by it in this regard.

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

Whether it was mandatory for the Tribunal to take into consideration the representations made by the CG before passing the order for re-opening of accounts and till what FY, Tribunal can make such order of re-opening of accounts?

(a) No, it was discretionary for the Tribunal to take into consideration the representations made by the CG and the Tribunal can make such order of re-opening of accounts till FY 2016-17.

(b) No, provided reasons for the same are recorded in writing by the Tribunal for not taking into consideration the representations made by the CG and the Tribunal can make such order of re-opening of accounts till FY 2014-15.

(c) No, it was discretionary for the Tribunal to take into consideration the representations made by the CG and the Tribunal can make such order of re-opening of accounts till FY 2013-14.

(d) Yes, it was mandatory for the Tribunal to take into consideration the representations made by the CG and the Tribunal can make such order of re-opening of accounts till FY 2013-14.

Answer 105

(d) Yes, it was mandatory for the Tribunal to take into consideration the representations made by the CG and the Tribunal can make such order of re-opening of accounts till FY 2013-14.

Question 106

PMP Ltd. is an associate of PMP Inc, a company based in Kuwait. PMP Ltd. is listed in India having its corporate office at Assam. The company’s operations have remained stable over the years and the management is looking to expand the operations for which the management is considering different business ventures.

The company’s auditors issued clean audit report on the audit of the FS for the YE 31 March 2020.

For the FY ended 31 March 2021, the auditors made some changes in their audit team. While the audit partner remained the same, the field in charge has been replaced, as the field in charge who was engaged in the audit of the FS for the YE 31 March 2020 has left the firm.

The audit team has a new person as (EQCR) who has specialized knowledge of the industry in which the company is operating. EQCR has been employed with the firm for over 2.5 years and is yet to clear his CA final exams. The changes were made on the basis of the consideration that the firm has enough experience of engagement with this client.

The audit team commenced the work for audit of the YE 31 March 2021 after detailed planning and it was observed that EQCR had various comments on certain matters which were not accepted by the audit partner. Audit partner had better understanding of the client and after assessing the comments of the EQCR did not find those relevant. The audit partner without concurrence of the EQCR finalized the audit and issued the audit report.

In the given situation, please advise which one of the following is correct?

(a) The changes in the audit team were not appropriate except for the field in charge who had left the firm. EQCR should have
been a member of the ICAI.

(b) The audit partner did the right thing by ignoring the comments of EQCR as he is the final authority to decide on any matter
and take decisions. Further EQCR was junior to the audit partner.

(c) The audit partner must discuss each and every comment of EQCR with the client and ensure that a proper disclosure in
respect of those points should be made either in the FS or the audit report.

(d) EQCR had sufficient and appropriate experience. He should have been given the authority to objectively evaluate various
matters, before the report is issued, the significant judgments the engagement team made and the conclusions they reached
in formulating the report. By ignoring the comments of the EQCR, audit partner took additional professional responsibility
on himself. By considering the comments of EQCR, he could have passed the responsibility to EQCR.

Answer 106

(a) The changes in the audit team were not appropriate except for the field in charge who had left the firm. EQCR should have
been a member of the ICAI.

Question 107

VKPL & Associates, a firm of CA, have been operating for the last 5 years having its office in Gurgaon. The firm has staff of around 25 persons with 3 Partners.

The firm has been offering statutory audit, risk advisory and tax services to its various clients. The major work of the firm is for
taxation services. The audit partners also discussed that the firm needs to work significantly to improve the quality of the services they offer and that would also help the firm to grown its business. Considering this objective, the firm started training programmes for the staff which were made mandatory to be attended.

During one of the training programmes on quality, a topic was discussed regarding the information that should be obtained by the firm before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. It was explained that the following points may assist the engagement partner in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate (as per SA 220):

(i) The integrity of the principal owners, key management and TCWG of the entity;
(ii) The qualification of all the employees of the entity;
(iii) Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, including
time and resources;
(iv) The remuneration offered by the entity to its various consultants;
(v) Whether the firm and the engagement team can comply with relevant ethical requirements; and
(vi) Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.

We would like to understand from you which of the above mentioned points are relevant for the topic under discussion?
(a) i, ii, iv and v.
(b) ii, iv, v and vi.
(c) iii, iv, v and vi.
(d) i, iii, v and vi.

Answer 107

(d) i, iii, v and vi.

Question 108

ZOV is a private limited company engaged in the business of mining. The company’s operations are fairly large and its turnover is INR 4,000 crore on an annual basis. Due to the nature of the business and the size of the company, the company has appointed a firm of CAs as its statutory auditors who have the relevant experience of the industry in which the company has been operating.

During the course of the audit of the FS for the YE 31st March 2021, the audit team had various observations which resulted in many adjustments in the FS of the company and that was also appreciated by the CFO of the company. At the time of final reviews of the audit team, the audit partner requested working paper on final analytical procedures from the engagement team, however, the engagement team explained that they performed substantive testing procedures which also resulted in some adjustments and the same was incorporated in the final set of FS given to the audit partner for the review and accordingly there was no need to perform final analytical procedures.

Audit partner was not convinced with this and requested the engagement team to perform this procedure. Considering that the
timeline to conclude the audit was approaching, the audit partner also requested the CFO that the audit team would need some more time to perform final analytical procedures. CFO was very impressed with the engagement team and agreed for the time but he also told the audit partner that work of the team was excellent and hence the audit partner should avoid these additional procedures.

You are requested to give your view in respect of this matter as per SA 520.

(a) The explanation of the audit team was correct. After doing substantive testing which also resulted in audit adjustments,
there was no need to perform final analytical procedures.

(b) The suggestion of CFO should have been considered by the audit partner as the CFO was observing the work of the
engagement team and hence he could assess that better than the audit partner.

(c) The requirement in view of the audit partner was valid. The conclusions drawn from the results of final analytical procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the FS.

(d) The audit team did the right thing by not performing final analytical procedures, however, one additional procedure in
that case should have been - obtain the document containing the analysis performed by the client on the FS. This document is required to be assembled in the audit file.

Answer 108

(c) The requirement in view of the audit partner was valid. The conclusions drawn from the results of final analytical procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the FS.

Question 109

You are the audit senior of T & Co. are responsible for the audit work to be managed for the fixed assets of the company. T & Co. has 4 properties amounting to Rs. 12.5 crore. One of the important tasks ahead for you is to confirm the ownership of these properties.

Which of the following would provide the most persuasive evidence of the ownership?

(a) To conduct a physical inspection of all the properties located at different areas.

(b) To ask the management registration documents of these properties and inspect and verify them.

(c) To check whether all the properties are recorded properly in the fixed asset register and depreciation has been calculated
correctly.

(d) Enquire with the management, if these properties are insured and review the insurance documentation.

Answer 109

(b) To ask the management registration documents of these properties and inspect and verify them.

Question 110

P Bank was engaged in the business of providing Portfolio Management Services (PMS) to its customers, for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the Bank’s FS for the year 2020-21.

Your senior has instructed you to verify the transactions of PMS. While verifying the transactions you noticed that the bank has not prepared separate record for PMS transactions from the Bank’s own investments. As a statutory auditor what will be your decision for verification of PMS transactions?

(a) It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so the auditor can verify the PMS transactions as part of investment verification for Bank’s FS and submit the audit report accordingly.

(b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and the auditors are required to give a certificate separately for the same. So, in the above case the auditor should not verify the PMS transactions and advise the bank to segregate the PMS transactions from its own investments and provide the certificate of external auditor.

(c) The auditor can give a qualified opinion in his audit report on the FS of the Bank and report the matter in special purpose certificate.

(d) Auditor should verify that PMS funds are not utilized for lending, inter-bank deposits or deposits to corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded separately or not will not matter for the auditor.

Answer 110

(b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and the auditors are required to give a certificate separately for the same. So, in the above case the auditor should not verify the PMS transactions and advise the bank to segregate the PMS transactions from its own investments and provide the certificate of external auditor.