Question 1

State with reasons whether the following statements are correct or incorrect:

Accepted Answer

**Statement (a): INCORRECT.** In an automated environment, application controls and General IT Controls (GITCs) are highly interdependent and interrelated. Application controls depend on the IT environment and general systems controls (access controls, segregation of duties, system monitoring) to function effectively. SA 315 and SA 330 establish this relationship. The statement's claim that they are "not interrelated" contradicts auditing standards.

**Statement (b): INCORRECT.** Historical financial information represents actual transactions and events that have already occurred, not assumptions about future events. The statement confuses historical financial information with prospective financial information (forecasts/budgets), which are based on assumptions about future events. ICAI auditing framework distinguishes between these categories.

**Statement (c): INCORRECT.** As per SA 230 (Audit Documentation), the auditor shall assemble the audit documentation in the audit file and complete the administrative process of assembling the final audit file on a timely basis. Specifically, this assembly should be completed **after the date of the auditor's report**, not before. The stated timeline in the question is reversed.

**Statement (d): INCORRECT.** When a firm (partnership) is appointed as auditor of a company, the audit report is signed in the **firm's name** (e.g., "XYZ & Co., Chartered Accountants"), not solely in the personal name of the signing partner. The partner's …

Question 2

The following is the Balance Sheet of Purple Limited as at 31st March, 2022:

Equity and Liabilities:
Share Capital (Note 1): Rs. 15,00,000
Reserves & Surplus (Note 2): Rs. (3,00,000)
Trade Payables: Rs. 2,20,000
Short Term Borrowings – Bank Overdraft: Rs. 2,00,000
Total: Rs. 16,20,000

Assets:
Property, Plant and Equipment (Note 3): Rs. 10,20,000
Intangible Assets (Note 4): Rs. 1,20,600
Inventories: Rs. 1,70,000
Trade Receivables: Rs. 3,01,800
Cash and cash equivalents: Rs. 7,600
Total: Rs. 16,20,000

Notes to Accounts:
(1) Share Capital: 90,000 Equity Shares of Rs. 10 each fully paid Rs. 9,00,000; 6% Preference Share Capital Rs. 6,00,000; Total Rs. 15,00,000
(2) Reserves & Surplus: Profit & Loss account (Dr.) Rs. (3,00,000)
(3) Property, Plant and Equipment: Land and Building Rs. 5,40,00…

Accepted Answer

**Internal Reconstruction of Purple Limited — 31st March 2022**

**Preliminary Workings (Key Scheme Points):**

**(i) Preference Share Conversion:** Annual dividend must remain unchanged. 6% on ₹6,00,000 = ₹36,000. For 8%: New capital = ₹36,000 ÷ 8% = **₹4,50,000**. Reduction = ₹1,50,000 → credited to **Capital Reduction Account**.

**(ii) Equity Share Reduction:** 90,000 shares × ₹10 = ₹9,00,000 → 90,000 shares × ₹8 = ₹7,20,000. Reduction = ₹1,80,000 → credited to **Capital Reduction Account**.

**(iii) Arrears of Preference Dividend:** 6% × ₹6,00,000 × 3 years = ₹1,08,000 in arrears. Since these dividends were **never formally declared**, no liability was recorded in the books. The cancellation is a **memorandum note** only — no formal double-entry journal entry is required.

**(vii) P&L Write-off:** P&L (Dr.) = ₹3,00,000. Future profits: ₹90,000 × 3 = ₹2,70,000. Residual written off now = ₹3,00,000 − ₹2,70,000 = **₹30,000** through Capital Reduction.

---

**JOURNAL ENTRIES:**

**Entry 1 — Conversion of Preference Share Capital:**
Dr. 6% Preference Share Capital A/c ₹6,00,000
  Cr. 8% Preference Share Capital A/c ₹4,50,000
  Cr. Capital Reduction A/c ₹1,50,000
*(Being preference shares converted from 6% to 8% at reduced capital to maintain identical annual return)*

**Entry 2 — Reduction of Equity Share Capital:**
Dr. Equity Share Capital A/c (₹10) ₹9,00,000
  Cr. Equity Share Capital A/c (₹8) ₹7,20,000
  Cr. Capital Reduction A/c ₹1,80,000
*(Being face value of equity sha…

Question 3

S & Co., Chartered Accountants, are appointed as the auditors of ABC Ltd. CA S, the engagement partner, has come across the following while verifying equity share capital of the company: (i) He noticed that some of the equity shares are held by promoters. (ii) Some shares are issued as sweat equity shares to the employees. What is the meaning of sweat equity shares? What are the disclosure requirements of such promoter's shareholding?

Accepted Answer

**Sweat Equity Shares** are shares issued by a company to its employees or directors as consideration for their contribution of **known and tangible know-how or intellectual property rights** or rendering of services to the company. These shares can be issued at a discount to the face value or at par value, depending on the valuation of the non-cash contribution. They represent compensation for expertise, technical knowledge, or strategic contribution rather than monetary investment.

**Key Features of Sweat Equity Shares:**

Sweat equity shares must satisfy specific conditions under **Section 54 of the Companies Act, 2013**. The company's board must approve the issue, and shareholder approval through special resolution is required. The number of such shares issued cannot exceed **15% of the total issued capital** at any point. The consideration for sweat equity is typically valued by an independent valuer appointed by the board, ensuring proper accounting recognition and preventing undervaluation.

**Disclosure Requirements of Promoter's Shareholding:**

Promoter shareholding must be disclosed comprehensively in accordance with **Schedule V of the Companies Act, 2013** and **Rule 5 of the Companies (Management and Administration) Rules, 2014**. These disclosures form part of the **Directors' Report** and must include the names and addresses of all promoters and promoter group members, the number of shares held by each promoter, the percentage of shareholding relative to tota…

Question 4

CA P is appointed as an auditor of XYZ Limited for the F.Y. 2021-22. The management of XYZ Limited has requested the auditor to change the terms of original engagement as the company has diversified its business and few new products have been introduced by the company. Can CA P agree to the request made by the management? Under which circumstances can the client make a request to the auditor for a change in the terms of engagement?

Accepted Answer

**Yes, CA P can agree to the request made by management**, but only if the change is appropriate and does not restrict the scope of audit inappropriately. The circumstances here—diversification of business and introduction of new products—constitute legitimate reasons for modifying engagement terms, as they directly affect the nature and scope of audit procedures required.

**Circumstances Under Which Client Can Legitimately Request Change in Engagement Terms:**

1. **Significant Changes in Business Operations:** When a client undergoes substantial changes in business activities, such as diversification into new product lines, market expansion, or introduction of new revenue streams (as in this case), the audit approach and procedures must be modified accordingly. New business areas may require different expertise, additional substantive procedures, or extended analytical reviews.

2. **Changes in Regulatory or Accounting Framework:** Introduction of new accounting standards, changes in tax regulations, modifications in corporate governance requirements, or changes in regulatory compliance obligations may necessitate revised engagement terms to reflect updated audit scope.

3. **Changes in Financial Reporting Requirements:** If there are changes in listed company norms, stock exchange requirements, or new disclosures mandated by law, the auditor's engagement terms must be amended to incorporate these requirements.

4. **Organizational Restructuring:** Mergers, acquisitions, d…

Question 5

What are the matters that the auditor shall consider while designing an audit sample?

Accepted Answer

According to **SA 530 (Audit Sampling)**, the auditor shall consider the following matters while designing an audit sample:

**1. Audit Objective:** The auditor must clearly define the specific assertion being tested (existence, completeness, accuracy, valuation, or authorization of transactions/balances) to ensure the sample design is appropriate for testing that objective.

**2. Definition of Population:** The population from which the sample is to be drawn must be clearly defined and appropriate to the audit objective. The population should be complete and include all items relevant to the assertion being tested. Any items excluded must be considered separately.

**3. Sampling Risk:** The auditor should determine the acceptable level of sampling risk, which is the risk that the auditor's conclusion based on the sample may differ from the conclusion if the entire population were examined. Lower sampling risk requires larger sample sizes.

**4. Materiality and Tolerable Error:** The auditor must consider materiality and performance materiality for the assertion being tested. This helps determine the acceptable maximum error (tolerable error) in the sample, which inversely affects required sample size.

**5. Stratification:** The auditor should consider whether dividing the population into more homogeneous sub-groups (strata) would be beneficial in reducing sampling risk and improving efficiency. This is particularly useful when the population contains items of varying sizes …

Question 6

In an automated environment, General IT controls are policies and procedures that relate to many applications and support the effective functioning of application controls. One such area is access security. What is the objective of access security and what are the activities included in it?

Accepted Answer

**Objective of Access Security:** The primary objective of access security in an automated environment is to ensure that only **authorized personnel** have appropriate access to systems, applications, data, and resources based on their roles and responsibilities. It aims to maintain **confidentiality, integrity, and availability** of information assets while preventing unauthorized access, modification, or disclosure. Access security also ensures **segregation of duties** to prevent concentration of incompatible functions and reduce the risk of fraud or errors.

**Activities Included in Access Security:**

1. **User Identification and Authentication** – Establishing mechanisms to identify users uniquely through user IDs, employee numbers, or credentials. Authentication is performed through passwords, multi-factor authentication (MFA), biometric controls, or other methods to verify that users are who they claim to be.

2. **Authorization and Access Rights Assignment** – Determining and granting appropriate access rights to systems and data based on user roles, job responsibilities, and the principle of least privilege. Access is granted only to resources necessary for performing job functions.

3. **Access Provisioning and De-provisioning** – Establishing formal procedures for granting access to new users upon joining the organization and promptly revoking access when users are transferred, promoted, or leave the organization. Timely de-provisioning is critical to prevent unau…

Question 7

The objective of auditing is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion. This can be obtained by performing which procedures. Name the types of audit procedures the auditor can perform to obtain audit evidence?

Accepted Answer

**Types of Audit Procedures to Obtain Audit Evidence:**

**1. Risk Assessment Procedures**

These procedures are performed to understand the entity and its environment, including internal controls, to identify and assess risks of material misstatement. They include inquiry, analytical procedures, observation, and inspection. However, risk assessment procedures alone do not provide sufficient appropriate audit evidence for responding to assessed risks.

**2. Tests of Controls**

These procedures are designed to evaluate the operating effectiveness of internal controls in preventing or detecting and correcting material misstatements at the assertion level. They are performed when the auditor's risk assessment includes an expectation that controls are operating effectively or when substantive procedures alone cannot provide sufficient appropriate audit evidence. Methods include inquiry, inspection of evidence, observation, and re-performance of controls.

**3. Substantive Procedures**

These procedures are designed to detect material misstatements at the assertion level and comprise two types:

**(a) Substantive Analytical Procedures:** These involve evaluating financial and non-financial information through analysis of plausible relationships among data. They help identify unusual amounts or unexpected relationships that may indicate misstatements.

**(b) Tests of Details:** These include testing of transactions, balances, and disclosures to identify misstatements. Methods incl…

Question 8

M/s SS & Associates have been appointed as statutory auditors of Green Limited, a company engaged in the business of manufacturing of hardware products. They are analyzing the monthly trends for other expenses like rent, power and fuel, repairs, etc. and are also verifying attributes of such types of expenses. List down the attributes for verifying such expenses.

Accepted Answer

**Audit Attributes for Verifying Other Expenses**

When verifying other expenses such as rent, power and fuel, repairs and maintenance, the auditor must satisfy themselves on the following key attributes:

**1. Existence or Occurrence** — Expenses recorded in the books should actually exist and the transactions should have genuinely occurred during the period. For example, rent paid should be supported by valid lease agreements and payment evidence.

**2. Completeness** — All expenses that should be recorded have been included in the accounts. No material expenses have been omitted or overlooked. The auditor should verify that all utility bills, repair invoices, and rental payments have been captured.

**3. Accuracy** — Expenses are recorded at the correct amount. Invoices, bills, and payment records should be verified for accuracy of calculation and amounts. For power and fuel, units consumed multiplied by correct rates should equal the recorded amount.

**4. Cutoff** — Expenses are recorded in the correct accounting period. Rent accrued or repairs done in one period should not be recorded in another period. Year-end accruals and reversals must be verified.

**5. Classification** — Expenses are properly classified and recorded in the appropriate ledger heads. Repairs that qualify as capital expenditure should not be expensed, and routine repairs should be distinguished from maintenance contracts.

**6. Authorization** — Expenses have been properly authorized by appropriate a…

Question 9

While auditing books of accounts of SOLAR Ltd., you observed that an amount of Rs 10,02,750 had been issued on 31/03/2022 has not been recognized in the books of accounts. As an auditor, you want to ensure that all trade receivable balances that are supposed to be recorded have been recognized in the financial statements. How will you achieve the stated objective?

Accepted Answer

The stated objective is to ensure **completeness** of trade receivables—that all receivables that should be recognized have been recorded in the financial statements. The unrecorded amount of Rs 10,02,750 indicates a potential **cut-off and completeness assertion** failure.

**Audit Procedures to Achieve Completeness:**

**1. Cut-Off Testing (Primary Procedure):** This directly tests whether goods dispatched before 31/03/2022 were recorded as sales. The auditor should:
- Obtain the goods dispatch register/shipping register for the last week of March and first week of April 2022
- Identify goods dispatched on/before 31/03/2022 and verify these are invoiced and recorded as receivables in March
- Trace the Rs 10,02,750 amount from the dispatch register to supporting documents (delivery notes, GRNs, invoices)
- Ensure goods dispatched after 31/03/2022 are recorded in the subsequent period only

**2. Reconciliation of Records:** Perform reconciliation between:
- Goods dispatch register and sales journal
- Sales journal and accounts receivable ledger
- Identify any gaps or mismatches indicating unrecorded transactions

**3. Examination of Supporting Documentation:**
- Review goods receipt notes (GRNs) from customers confirming delivery
- Check delivery notes, courier receipts, and shipping documents
- Verify all dispatches have corresponding invoices raised
- Examine sales contracts and purchase orders for evidence of transaction occurrence

**4. Subsequent Period Review:**
- Revie…

Question 10

A Ltd. has traded for ₹ 50.00 Lacs in "TETRA", a virtual currency, during the F.Y. 2021-2022 and earned a profit of ₹ 20.00 Lacs on it. What disclosure requirements are prescribed for such type of transactions done by the company?

Accepted Answer

**Disclosure Requirements for Virtual Digital Asset Transactions**

**1. Disclosure in Income Tax Return (ITR)**
A Ltd. must disclose in its ITR complete details of TETRA transactions: nature of virtual asset, cost of acquisition, sale proceeds (₹50 Lacs), profit earned (₹20 Lacs), dates of transaction, and exchange platform used. The profit is taxable under **Section 115BBH** of the Income Tax Act, 1961 at a flat rate of 30% from F.Y. 2022-23 onward; for F.Y. 2021-22, capital gains provisions apply.

**2. Schedule FA (Foreign Assets)**
If the virtual digital asset is held with exchanges outside India, it must be disclosed in **Schedule FA** of the ITR showing fair market value as on March 31st, location of exchange/platform, and acquisition/transfer details.

**3. Maintenance of Books and Records (Section 44AA)**
The company must maintain books of accounts recording:
- All transaction dates, quantities, and values
- Confirmations and statements from cryptocurrency exchanges
- Evidence of cost of acquisition and sale proceeds
- Exchange addresses/wallet details and transaction IDs
- Records must be preserved for minimum 8 years

**4. Exchange Reporting Requirements**
Cryptocurrency exchanges are mandated to:
- Report high-value transactions to tax authorities
- Maintain and submit e-KYC details of users
- File transaction information with the Tax Information Network (TIN)
- Provide periodic transaction statements enabling cross-verification

**5. Tax Treatment and Deduction R…

Question 11

Z Ltd. is a manufacturer of ready-made garments. During the year 2021-22, they have opened two new branches and there is a substantial increase in their sales. The management has appointed CA R to review the internal control system of the company as they feel that there are gaps in the control environment of the company. What is included in the control environment and what will the auditor evaluate in order to obtain an understanding of the control environment?

Accepted Answer

The **control environment** is the foundation for effective internal control and represents the overall attitude, awareness, and actions of the board, management, and staff regarding the importance of controls and the emphasis on integrity, competence, and accountability. It sets the tone of the organization and influences how internal control operates.

**Elements Included in the Control Environment:**

(1) **Integrity and Ethical Values**: The entity should establish and demonstrate ethical standards and integrity through a code of conduct, policies against fraudulent behavior, and mechanisms for reporting unethical conduct.

(2) **Commitment to Competence**: Management should establish expectations regarding competence and demonstrate commitment to it through recruitment of qualified personnel, training programs, and development of staff in critical roles.

(3) **Management's Philosophy and Operating Style**: The approach of management towards risk-taking, the importance given to controls, and overall business philosophy. The tone set by top management cascades throughout the organization.

(4) **Organizational Structure**: A clearly defined organizational structure with defined responsibilities, authority levels, and reporting lines. This ensures proper segregation of duties, accountability, and appropriate delegation.

(5) **Assignment of Authority and Responsibility**: Clear delineation of who is responsible for what, decision-making authority at various levels, and acc…

Question 12

HMB Limited's business has grown from one state of India to various countries of the world. Since the business has increased manifold, the management decided to appoint joint auditors for conducting the statutory audit of the company. They appointed three CA firms for it. For which audit work the joint auditors will be jointly & severally responsible?

Accepted Answer

**Joint Auditors – Joint and Several Responsibility**

**Concept of Joint and Several Responsibility**: When multiple auditors are appointed as joint auditors, each auditor is individually responsible for the entire audit engagement. This is termed "joint and several liability," meaning any one auditor can be held liable for the entire audit work, and they cannot limit their responsibility to only a portion of the engagement.

**Audit Work Subject to Joint and Several Responsibility**:

1. **Audit Opinion and Report**: Joint auditors are jointly and severally responsible for forming and expressing the audit opinion on the financial statements. Both auditors must agree on the opinion, and each auditor's signature on the audit report makes them equally liable.

2. **Overall Audit Conclusions**: The assessment of whether financial statements present a true and fair view, compliance with accounting standards (Ind AS/AS), and applicable laws is a joint responsibility.

3. **Compliance with Auditing Standards**: Adherence to Standards on Auditing (SA) and quality control standards (SA 220) is mandatory for all joint auditors collectively and individually.

4. **Evaluation of Internal Controls**: Assessment of the effectiveness of internal control systems and their adequacy is jointly the responsibility of all auditors.

5. **Going Concern Assessment**: Evaluation of the company's ability to continue as a going concern (SA 570) falls under joint responsibility.

6. **Related Party T…

Question 13

ABC Ltd. has many divisions and branches across the country. They have an internal control system which is well established and maintained by the management on a regular basis. Explain the meaning of internal control as per SA-315 and also state the benefits of understanding the internal controls of a company.

Accepted Answer

**Meaning of Internal Control as per SA-315:**

As per **SA-315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment)**, internal control is defined as a process designed and implemented by those charged with governance, management, and other personnel to provide **reasonable assurance** regarding the achievement of the entity's objectives with respect to: (i) reliability of financial reporting; (ii) effectiveness and efficiency of operations; and (iii) compliance with applicable laws and regulations.

Key characteristics of this definition are: (1) Internal control is a **process** — not a single act or event, but an integrated approach involving people, systems, and procedures; (2) It is designed and implemented by **people at all levels** of the organization, not just the internal audit function; (3) It provides **reasonable assurance** — not absolute assurance, since human judgement and limitations exist; and (4) It relates to the achievement of **multiple objectives** across financial reporting, operational effectiveness, and regulatory compliance.

**Benefits of Understanding Internal Controls:**

1. **Risk Assessment**: Understanding internal controls helps the auditor assess the risk of material misstatement at both the assertion level and overall financial statement level. A strong control environment reduces inherent risk.

2. **Audit Planning and Design**: Knowledge of controls enables the auditor to des…

Question 14

As per the Standard on Auditing (SA) 520 "Analytical Procedures", what are the examples of analytical procedures having consideration of relationships?

Accepted Answer

**Analytical procedures** under SA 520 involve evaluating financial information through analysis of plausible relationships among financial and non-financial data. **Analytical procedures with consideration of relationships** examine associations and dependencies between data elements. Key examples include: **(1) Ratio Analysis** – comparing profitability ratios (gross profit margin, net profit margin, return on equity), liquidity ratios (current ratio, quick ratio), efficiency ratios (asset turnover, receivables turnover, inventory turnover, and payables cycle) with those of prior periods, budgets, or industry benchmarks. **(2) Trend Analysis** – studying movements in accounts over multiple periods to identify patterns (e.g., operating expenses as a percentage of sales, changes in specific expense heads over time). **(3) Regression or Correlation Analysis** – establishing mathematical relationships between variables (e.g., relationship between production volume and utility costs, relationship between sales volume and commission expense). **(4) Variance Analysis** – comparing actual results against budget or standard expectations and investigating significant variances that indicate potential misstatements. **(5) Disaggregation Analysis** – breaking down financial data by segments, divisions, products, or geographical areas and analyzing relationships within each segment to understand business dynamics. **(6) Industry and Comparative Analysis** – comparing entity's financial …

Question 15

NG Ltd. appointed CA N as the statutory auditor for the F.Y. 2021-2022. Previous year's auditor gave a qualified opinion on the Comparative Financial Statements for the year ended 31.03.2021. What will be the reporting responsibility casted on CA N when he forms an opinion and prepares audit report on the Comparative Financial Statements for the F.Y. 2021-2022?

Accepted Answer

When CA N is appointed as statutory auditor for FY 2021-2022 and comparative financial statements including the prior year (31.03.2021, audited by the predecessor auditor with a qualified opinion) are presented, CA N's reporting responsibilities under **SA 710 - Comparative Information - Corresponding Figures and Comparative Financial Statements** are as follows:

**Opinion on Current Year Figures**: CA N should form and express an audit opinion on the FY 2021-2022 financial statements based on his own audit procedures and evidence gathered. This opinion will be unqualified, qualified, or adverse depending on the findings of the current year's audit.

**Comparative Figures (Prior Year)**: CA N should NOT re-audit the prior year's figures (31.03.2021) as these were already audited by the predecessor auditor. Instead, CA N's responsibility is limited to verifying that the comparative figures are accurately reproduced from the prior year's audited financial statements and that they are properly presented and disclosed in the current year's financial statements.

**Disclosure of Predecessor Auditor's Opinion**: In the audit report, CA N must clearly state that the comparative figures for the year ended 31.03.2021 were audited by the previous auditor, who expressed a **qualified opinion**. The nature and reason for the previous auditor's qualification should be appropriately disclosed or referenced in the notes to the financial statements or the audit report itself.

**Assessment …

Question 16

M/s RAP & Co., a firm of Chartered Accountants, has three partners, namely, Mr. R, Mr. A and Mr. P. Mr. R is on white time employment elsewhere and Mr. A & Mr. P do not hold any audits in their personal capacity or as partners of other firms. The Firm, currently, has an empty audit of 40 public companies. They are offered the statutory audit of a public company XYZ Ltd. Whether M/s RAP & Co. can accept the audit of XYZ Ltd.?

Accepted Answer

**Answer: YES, M/s RAP & Co. can accept the statutory audit of XYZ Ltd., subject to compliance with certain conditions.**

**Analysis:**

The eligibility of the firm to accept a statutory audit depends on examination of partner qualifications, disqualifications, and firm capacity under the Companies Act 2013.

**1. Partner Eligibility Check (Section 141, Companies Act 2013):**

Mr. R is on whole-time employment elsewhere. As per Section 141 of the Companies Act 2013, a person on whole-time employment elsewhere is **disqualified from being appointed as an auditor**. Therefore, Mr. R **cannot** be the signing partner or the in-charge auditor for XYZ Ltd. His involvement in signing the audit report or overseeing the audit is prohibited due to this disqualification.

However, Mr. A and Mr. P are **eligible**, as neither holds any audits in personal capacity nor is engaged in whole-time employment elsewhere. Both partners satisfy the eligibility criteria to act as auditors.

**2. Firm's Eligibility:**

A firm of Chartered Accountants is eligible for statutory audit if it has at least one partner who is qualified and not disqualified. Since M/s RAP & Co. has two eligible partners (Mr. A and Mr. P), **the firm itself is eligible** to accept the appointment. The firm is not disqualified merely because one partner (Mr. R) is ineligible.

**3. Audit Portfolio Assessment:**

The firm currently audits 40 public companies. Under the Companies Act 2013 and ICAI guidelines, there is **no st…

Question 17

CA M is the engagement partner of S Ltd. He has instructed his audit team to maintain proper audit documentation. The audit team members are not sure about the purpose for which the documentation should be made. Explain the various purposes of audit documentation with reference to SA 230.

Accepted Answer

**Purposes of Audit Documentation under SA 230:**

SA 230 – Audit Documentation establishes the requirement for the auditor to prepare and retain audit documentation that provides a sufficient and appropriate record of the basis for the auditor's conclusions and the evidence of the auditor's compliance with the Standards on Auditing (SAs). The various purposes of audit documentation are:

**1. Evidence of Audit Basis and Conclusions:** Audit documentation provides **evidence supporting the auditor's opinions and conclusions** on significant matters. It documents the nature, timing, and extent of audit procedures performed and the results thereof, particularly on areas requiring significant judgment and estimates. This ensures the auditor can demonstrate the basis for the audit opinion issued.

**2. Demonstrating Compliance with SAs and Regulations:** The documentation serves to **demonstrate that the audit was planned and performed in accordance with Standards on Auditing and applicable legal and regulatory requirements**. It provides evidence that the auditor has complied with relevant ethical requirements, including independence, and that the audit was conducted in accordance with professional standards.

**3. Record of Audit Procedures:** Audit documentation **maintains a comprehensive record of the nature, timing, and extent of audit work performed**. This includes the identification of the sources of information obtained, the audit procedures applied, and the evidence ga…

Question 18

You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that it is not possible to continue the performance of audit. As a Statutory Auditor, how you will deal with this situation?

Accepted Answer

When a Statutory Auditor encounters a misstatement resulting from fraud or suspected fraud and concludes that audit continuation is not possible, the following approach is required:

**1. Evaluate the Implications**: Under SA 240, the auditor must assess whether the fraud indicates a fundamental breakdown in internal controls, whether management's representations can be relied upon, and the pervasiveness of the fraud across the organization.

**2. Communicate with Audit Committee**: As per Section 143(12) of the Companies Act, 2013, the auditor must immediately report the fraud or suspected fraud to the Audit Committee (or Board if no Audit Committee exists), including the nature, extent, and implications of the fraud and reasons why audit continuation is not possible.

**3. Assess Feasibility of Continuation**: Before withdrawal, determine if:
   • The fraud is pervasive and affects multiple areas of the financial statements
   • Management's integrity is fundamentally compromised
   • Sufficient appropriate audit evidence cannot be obtained
   • Significant risks exist that override normal audit procedures

**4. Withdraw from Engagement**: If continuation is deemed infeasible, the auditor should:
   • Provide written notice to the Board/Audit Committee stating reasons for withdrawal
   • Comply with the notice period as required by law (typically 30 days)
   • Ensure withdrawal is documented formally

**5. Regulatory Reporting**: For listed companies, report to SEBI as requ…

Question 19

Answer any four of the following:

Accepted Answer

**(a) Revenue Recognition as per AS-9 (Accounting Standard 9 — Revenue Recognition)**

**(i) Delayed delivery (Bill and Hold):** Revenue **can be recognized**. When the buyer takes title and accepts billing, the significant risks and rewards of ownership have been transferred to the buyer. Physical delivery is not necessary for revenue recognition. Revenue is recognized **at the time the buyer takes title and accepts billing**.

**(ii) Instalment Sales:** Revenue **can be recognized** at the time of sale (i.e., at the point of delivery), not over the instalment period. The revenue amount is the full sale price. Finance charges embedded in instalments are recognized separately as interest income over the period.

**(iii) Trade Discounts and Volume Rebates:** These are **deducted from revenue**. They are not recognized as revenue at all. Revenue is recorded at the **net amount** after deducting trade discounts and volume rebates.

**(iv) Insurance Agency Commission:** Revenue is recognized **when the service of procuring the insurance policy is rendered** (i.e., when the policy is issued). For recurring/renewal commissions where the agent continues to render services, revenue is recognized proportionately over the period of the policy.

**(v) Advertising Commission:** Revenue is recognized **when the related advertisement appears before the public**, i.e., on the date of publication or broadcast, not when the commission is billed or received.

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**(b) Buy-Back of Shares — Jo…

Question 20

TS Ltd. has raised funds by issuing fully convertible debentures. These funds were raised for the expansion and diversification of the business. However, the company utilised these funds for repayment of long-term loans and advances. What are the reporting requirements under CARO 2020 in this case?

Accepted Answer

Under CARO 2020, Clause 3(ix), the auditor is required to examine and report on long-term borrowings (including fully convertible debentures) raised during the year, specifically whether the stated purpose has been complied with. In the case of TS Ltd., the following reporting requirements arise from the misutilization of funds:

**Examination of Purpose vs. Actual Utilization**: The auditor must verify that the funds raised through fully convertible debentures have been applied for the stated purpose of expansion and diversification. Since the funds were actually used for repayment of long-term loans and advances, this constitutes a material deviation from the stated purpose that must be reported.

**Reporting in Audit Report**: If the deviation is material, the auditor should qualify the audit report by including an Emphasis of Matter paragraph or, in severe cases, provide a qualified opinion. The auditor's report must specifically highlight that the proceeds of convertible debentures were not utilized for their stated purpose, as this is a significant fact affecting the assessment of the company's capital management and financial position.

**Disclosure Requirements**: CARO 2020 mandates that the company disclose in the notes to the financial statements: (a) the purpose for which fully convertible debentures were raised; (b) the actual utilization of these funds; (c) the amount and nature of utilization for loan repayment instead of expansion; and (d) the reasons for devia…

Question 21

M/s PQ & Co., Chartered Accountants have been appointed as statutory auditor of CBD Multiplex Cinema Ltd. The audit team started the detailed review and verified the ledger and other books of accounts for the F.Y 2021-2022. However one of the team members is of the view that the internal control mechanism of the company should also be verified. Can you guide the audit team about the areas that will be verified by the internal control mechanism?

Accepted Answer

The internal control mechanism is a system of policies and procedures established to ensure the accuracy, reliability, and security of financial information and assets. As per SA 315, the auditor must obtain an understanding of internal controls relevant to the audit.

**Areas to be Verified:**

**1. Control Environment**: The overall integrity, ethical values, and competence of the organization, including management's philosophy, organizational structure, and commitment to competence.

**2. Segregation of Duties**: Verify that critical functions are separated among different individuals: initiation of transactions (ticket sales initiation), authorization and approval (cash deposit approvals), execution (receiving payments), recording in accounts (journal entries and ledger posting), and reconciliation (bank reconciliation). For CBD Multiplex, this would cover ticket sales, cash collection, deposits, and accounting records.

**3. Authorization and Approval Procedures**: Check that all transactions are authorized at appropriate levels before execution. This includes revenue transactions (ticket and concession sales), operating expenditures (routine expenses), and capital expenditures (equipment purchases).

**4. Physical Controls**: Verify safeguards over cash in hand and bank deposits, inventory (tickets and snacks), fixed assets and projection equipment, and important business documents.

**5. Recording and Reconciliation Procedures**: Ensure all transactions are recorded ti…

Question 22

CARD Ltd. is into the banking business and handles large amount of loans and advances of different kinds. Non-performing assets are on the rise since last two quarters. The management is concerned with correct provisioning for the same. CA B is appointed to check whether correct provisioning of NPA's is being made by the bank or not. What are the aspects that will be verified by CA B for this purpose?

Accepted Answer

CA B's verification of NPA provisioning would focus on the following key aspects:

**1. Proper Classification of NPAs**: Verify that all advances are correctly classified into categories as per RBI IRAC (Income Recognition, Asset Classification, Provisioning) framework. This includes ensuring assets are classified as Standard, Sub-standard, Doubtful, or Loss based on the period of default (0-90 days, 90-180 days, beyond 180 days, or irrecoverable respectively).

**2. Completeness of NPA Identification**: Confirm that all advances meeting NPA criteria have been identified. CA B would examine the advances register, monthly statements of accounts, and recovery records to ensure no NPAs have been omitted. Track interest accrual suspension from the date of classification as NPA.

**3. Correct Provisioning Percentages**: Verify that provisions are made at the prescribed rates as per current RBI guidelines. Sub-standard assets require 15-25% provision, Doubtful assets require graduated provisions (25% for first year, 40% for second year, 100% after third year), and Loss assets require 100% provision. Ensure bank's policy aligns with regulatory minimums.

**4. Documentation and Record Maintenance**: Review NPA registers, dossier files, and advances falling due reports maintained by the bank. Verify that aging analysis is properly done and maintained with supporting documents for each NPA classification decision.

**5. Recovery Efforts and Follow-up**: Examine evidence of recovery att…

Question 23

CA Sevak is appointed as an auditor of a Municipal Corporation of a big smart city. He wants to verify various expenditures of the Municipality. Define the term "Municipality" and state what are the heads under which expenditures incurred by the Municipalities and Corporations can be broadly classified?

Accepted Answer

**Definition of Municipality:** A Municipality is a local body corporate established under the relevant Municipal Corporation Act or Municipal Law of a State. It is a statutory authority responsible for administering municipal services and functions within a defined municipal area (city or town). It has perpetual succession, common seal, and capacity to own property, enter contracts, and perform civic functions for the benefit of residents within its jurisdiction.

**Classification of Municipal Expenditures:**

Municipal expenditures can be broadly classified under the following heads:

**1. General Administration:** This includes salaries and allowances of municipal officers and staff, rent, printing, stationery, postage, telephone, utilities, and other administrative overhead expenses necessary for running the municipal machinery.

**2. Public Health & Sanitation:** Expenditures incurred on conservancy (scavenging), street cleaning, disposal of waste, maintenance of public health facilities, disease surveillance, immunization programs, and health-related services to the public.

**3. Education:** Expenditures on construction, maintenance, and repair of municipal schools; salaries of teachers; provision of educational materials; scholarships; and other educational services.

**4. Public Works & Infrastructure:** This major head includes expenditures on construction, maintenance, and repair of roads, streets, drains, water supply systems, streetlights, public buildings, parks…

Question 24

Ban LLP is formed during the year 2021-22. They are not sure about the type of books of accounts to be maintained. What are the books of accounts that the LLP is required to maintain?

Accepted Answer

Ban LLP is required to maintain books of accounts under **Section 40 of the Limited Liability Partnership Act, 2008** and **Rule 8 of the Limited Liability Partnership Rules, 2009**. These books should be kept at the registered office or at such other place in India as the partners decide.

The books of accounts that Ban LLP must maintain are:

**1. Subsidiary Books (Day Books/Books of Original Entry):**
• **Cash Book**: To record all cash receipts and payments on a daily basis
• **Bank Book**: To record bank deposits and withdrawals (can be combined with cash book as a three-column cash book)
• **Sales Book**: To record sales transactions on credit with details of goods sold and customers
• **Purchases Book**: To record purchases on credit from suppliers
• **Sales Return Book**: To record goods returned by customers (if applicable)
• **Purchases Return Book**: To record goods returned to suppliers (if applicable)
• **Journal Proper**: To record non-routine transactions such as adjustment entries, opening entries, and other miscellaneous transactions

**2. Principal Books:**
• **General Ledger**: Containing classified accounts for all assets, liabilities, expenses, incomes, and capital. All transactions are summarized and grouped by nature
• **Cash Ledger** (if separately maintained): For detailed cash and bank account information

**3. Supporting/Subsidiary Records:**
• Original invoices, bills, and receipts
• Bank statements and bank reconciliation statements
• Confirmation…

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