CA Inter Audit & Ethics

Answer: (B)

The engagement partner must follow the systematic approach to managing threats to independence as prescribed in the Code of Ethics for Chartered Accountants in India, which is based on the IESBA framework.

(i) Obtain information from the firm to identify and evaluate the threats — Correct. The first step is to gather complete information about the gifts/hospitality received and the loan arrangement to identify all potential threats (self-interest threat, familiarity threat) and their nature and extent.

(ii) Evaluate whether the action creates threats to independence — Correct. Once identified, the partner must evaluate whether these actions actually create threats and assess their significance to determine if they impair or can be perceived to impair independence in fact or in appearance.

(iii) Apply safeguards or eliminate threats to an acceptable level — Correct. If threats are identified, safeguards must be applied (e.g., recusal of affected team members, reduced involvement, mentoring by uninvolved partner, etc.) to bring threats to an acceptable level, or the threats must be eliminated entirely.

(iv) Report the issue directly to the client's CSR Committee for their resolution — Incorrect. Independence and ethics matters are internal firm governance issues, not to be resolved by the client's CSR Committee. The firm must address these internally through its ethics and governance processes. Reporting to the client's committee is inappropriate and does not resolve the auditor's independence concerns.

(v) Consider mitigation of the engagement if threats remain unacceptable — Correct. This is the final step. If after evaluation and application of safeguards, threats remain at an unacceptable level (e.g., loan from client cannot be mitigated), the firm should consider withdrawing from the engagement or modifying its scope to eliminate the threat.

Therefore, actions (i), (ii), (iii), and (v) must be taken.

Answer: (C)

The dividend declared by the board on 15th April 2025 should not be recognised as a liability in the financial statements as at 31st March 2025. Instead, the amount should be appropriately disclosed in the notes.

Reason: Under Ind AS 10 "Events after the Reporting Period", a dividend becomes a liability only when it has been formally declared or approved by the board. Since the dividend was declared on 15th April 2025, which is after the reporting date of 31st March 2025, no obligation existed at the balance sheet date. The dividend is therefore a non-adjusting event.

Treatment: Non-adjusting events should not be recognized in the financial statements but must be disclosed in the notes if material. Accordingly, the proposed/declared dividend should be disclosed in the notes to the financial statements, typically under "Events after the Reporting Period" or in a note on "Dividend and Appropriations", stating the date of declaration and the amount per share or in total.

The accountant's treatment of recognising it as a liability at 31st March 2025 was incorrect because the declaration occurred after year-end.

Answer: (B)

Acceptance of significant gifts and hospitality from a client creates a Familiarity Threat because it establishes a sense of closeness and obligation that could compromise professional objectivity and judgment. The professional may feel psychologically aligned with the client's interests.

A loan taken from the client creates a Self-Interest Threat because the professional becomes financially dependent on and indebted to the client. This financial interest directly threatens independence as the professional's judgment could be influenced by the desire to maintain favorable relations with the lender.