Question 1

Following is the extract from the Balance Sheet of Ram Pvt. Ltd.: (i) Borrowings as on 31/03/2025 ₹10 Cr. (ii) Fresh borrowings from bank during the year ₹3 Cr. (iii) Borrowings repaid during the year ₹5 Cr. Pari passu charge has been created on the assets of the company. Further, borrowing limits have not been exceeded. From the above information, what audit procedures would you perform, to ensure that all borrowings reflected in the balance sheet, are valid claims owed to banks or other third parties?

Accepted Answer

**Audit Procedures for Verification of Borrowings — Ram Pvt. Ltd.**

The primary audit objective here is to verify the **completeness, existence, accuracy, and ownership** of borrowings reflected in the balance sheet as on 31/03/2025. The auditor must obtain sufficient appropriate audit evidence under **SA 500 (Audit Evidence)** and assess risks under **SA 315 (Identifying and Assessing Risks of Material Misstatement)**. The following procedures would be performed:

**1. Obtain and Reconcile the Borrowings Schedule**
Obtain a detailed schedule of all borrowings — opening balance ₹12 Cr. (₹10 Cr. closing + ₹5 Cr. repaid − ₹3 Cr. fresh), fresh borrowings ₹3 Cr., repayments ₹5 Cr., and closing balance ₹10 Cr. Reconcile this with the general ledger and balance sheet. Any unexplained differences must be investigated.

**2. Obtain Direct Confirmations from Lenders**
Send **bank confirmation letters** directly to all lending banks and financial institutions as on 31/03/2025, independently verifying the outstanding loan balances, interest rates, repayment schedules, and security details. This is the most reliable evidence for existence and accuracy of borrowings per **SA 505 (External Confirmations)**.

**3. Verify Loan Sanction Letters and Agreements**
Inspect the original **loan sanction letters, loan agreements, and term sheets** for each borrowing to confirm: (a) sanctioned limits, (b) rate of interest, (c) repayment terms, and (d) security / charge details. This ensures borrowin…

Question 2

State the auditor's duty regarding audit of LLP.

Accepted Answer

The auditor's duties regarding audit of LLP are prescribed under the **Limited Liability Partnership Act, 2008** and the **Limited Liability Partnership Rules, 2009**.

**1. Examination of Accounts and Records**: The auditor must examine the financial statements, accounts, records, and documents of the LLP. This includes scrutinizing the authenticity, accuracy, and proper recording of all financial transactions, ensuring compliance with applicable accounting standards.

**2. Verification of Assets and Liabilities**: The auditor shall verify the existence, ownership, valuation, and proper classification of assets and liabilities reflected in the balance sheet. This requires examining physical evidence, obtaining confirmations from third parties, and verifying supporting documentation for all material items.

**3. Ensuring True and Fair View**: The auditor must satisfy himself that the financial statements present a true and fair view of the financial position and performance of the LLP as per the applicable **Accounting Standards specified in Schedule VI of the LLP Act**.

**4. Application of Standards on Auditing**: The auditor must conduct the audit in accordance with the **Standards on Auditing (SA)** issued by the ICAI. These standards require the auditor to plan and perform the audit with professional skepticism to obtain reasonable assurance that financial statements are free from material misstatement, whether due to fraud or error.

**5. Compliance Verification**: The …

Question 3

CA Raj has just concluded the audit of a company and noted certain findings (exceptions) in the IT environment and controls, which need to be asserted and reported accordingly. Specify, what points shall the auditor consider in assessing and reporting of audit findings in IT Environment and IT Controls.

Accepted Answer

**Assessment of IT Audit Findings:**

When assessing IT audit findings, the auditor should consider the following key points:

**Significance and Nature of Finding** - Evaluate whether the finding represents a control deficiency (weakness in design or operation), significant deficiency (more than inconsequential but less than material weakness), or material weakness (reasonable possibility of material misstatement). The severity should be assessed based on impact on data integrity, system availability, and financial reporting reliability.

**Root Cause Analysis** - Understand the underlying cause of the exception, including whether it resulted from process breakdown, lack of proper procedures, inadequate segregation of duties, inadequate monitoring, or technical system limitations. This helps determine if the finding is systemic or isolated.

**Scope and Extent** - Determine how widespread the issue is across systems, user populations, and transaction cycles. An isolated incident carries less significance than a pervasive control gap affecting multiple areas or substantial transaction volumes.

**Impact on Control Environment** - Assess how the finding affects the overall IT control framework and internal control environment. Consider whether it compromises the operating effectiveness of other related controls and financial reporting processes.

**Presence of Compensating Controls** - Identify whether compensating or mitigating controls exist that offset the identified defici…

Question 4

Mentioned below are the threats to independence of auditors. Classify them, with reasons, into the appropriate type of threats viz. Advocacy threat, Intimidation threat, Familiarity threat, Self-interest threat. (ANY FOUR): (i) Close business relationship with an audit client; (ii) Auditors perform services that are themselves subject-matter of audit; (iii) Auditor deals with shares or securities of the audited company; (iv) Long association between specific auditors and their specific client counterparts; (v) Auditor deterred from acting objectively with an adequate degree of professional skepticism.

Accepted Answer

The five scenarios are classified into threats to auditor independence as follows:

**(i) Close business relationship with an audit client – Self-interest threat**
When an auditor has a close business relationship with the audit client, they have a financial interest in maintaining that relationship. This creates a self-interest threat because the auditor's personal financial benefit may be compromised by the audit opinion. The auditor may hesitate to raise concerns or qualify the report, thereby impairing independence and objectivity.

**(ii) Auditors perform services that are themselves subject-matter of audit – Self-review threat**
When auditors perform non-audit services (such as internal audit, IT system implementation, or accounting services) that later become part of the audit scope, they must audit their own work. This self-review threat arises because the auditor has a vested interest in defending the correctness of services they provided and cannot maintain adequate professional skepticism in evaluating their own output.

**(iii) Auditor deals with shares or securities of the audited company – Self-interest threat**
When an auditor holds shares or securities in the audited company, their personal financial position is directly affected by the company's performance and the audit outcome. This creates a significant self-interest threat as the auditor may be biased toward forming favorable opinions to protect their investment, thereby compromising independence.

**(iv)…

Question 5

The auditor encountered following situations: Hyderabad unit: Due to administrative reasons, the management had taken up the stock verification of inventory on 15th March 2025 itself. Ahmedabad unit: The Company had taken up the inventory verification as planned on 31st March 2025. However, there were local disturbances in the city of Ahmedabad during the last week of March 2025, whereby the auditor cancelled his planned visit for attending inventory verification. In the above circumstances, what additional audit procedures are to be undertaken by the statutory auditor for inventory verification? Your answer should be in tune with relevant standards on auditing.

Accepted Answer

The relevant Standard on Auditing is **SA 501 – Audit Evidence – Specific Considerations for Selected Items**, which specifically governs the auditor's responsibilities regarding **inventory observation**. SA 501 requires the auditor to attend physical inventory counting unless impracticable, and where the count date differs from the balance sheet date, to perform additional roll-forward or roll-back procedures.

**Hyderabad Unit – Inventory counted on 15th March 2025 (not on Balance Sheet date 31st March 2025):**

Since management conducted the stock count on 15th March 2025 instead of 31st March 2025 (the balance sheet date), the auditor **must attend the count on 15th March** (or have attended it) and thereafter perform **roll-forward procedures** to bridge the gap between 15th March and 31st March 2025.

The additional audit procedures to be performed are:

(a) **Obtain and verify the inventory movement records** – All purchase receipts (goods inward) and dispatch/sales records (goods outward) between 15th March 2025 and 31st March 2025 should be examined to reconcile the count-date inventory to the balance-sheet-date inventory.

(b) **Cut-off procedures** – Verify that purchases and sales have been recorded in the correct period (i.e., transactions between 15th March and 31st March are properly included or excluded).

(c) **Evaluate whether the intervening period is reasonable** – Assess if the 16-day gap is such that the company's internal control over inventory movemen…

Question 6

Answer questions based on the following audit scenarios

Accepted Answer

**Part (a.i) — Most Appropriate Type of Audit Evidence for Assertion Verification**

Under **SA 500 – Audit Evidence**, the auditor is required to obtain sufficient appropriate audit evidence to draw reasonable conclusions on which to base the audit opinion. The **appropriateness** of audit evidence is a measure of its **quality**, encompassing two dimensions: **relevance** and **reliability**.

The most appropriate type of audit evidence, in order of decreasing reliability, is as follows:

(1) **Auditor's direct personal knowledge** — evidence obtained directly by the auditor through physical inspection, observation, recalculation, or re-performance is the most reliable, as it is not filtered through any third party.

(2) **External confirmations** — written responses obtained directly from independent third parties (e.g., bank confirmation letters) are highly reliable due to their independence from the entity.

(3) **Third-party sourced documents** — documents obtained from external sources (e.g., invoices from suppliers, bank statements) are more reliable than internally generated documents.

(4) **Internally generated documents with external corroboration** — e.g., a bank-reconciled cash book.

(5) **Internally generated documents** — e.g., ledger entries, purchase orders; least reliable when generated solely within the entity without external confirmation.

SA 500 also notes that **oral evidence (representations)** is less reliable than written evidence, and that **origi…

Question 7

The auditor encountered the following situations: Hyderabad unit: Due to administrative reasons, the management had taken up the stock verification of inventory on 15th March 2025 itself. Ahmedabad unit: The Company had taken up the inventory verification as planned on 31st March 2025. However, there were local disturbances in the city of Ahmedabad during the last week of March 2025, whereby the auditor cancelled his planned visit for attending inventory verification. In the above circumstances, what additional audit procedures are to be undertaken by the statutory auditor for inventory verification?

Accepted Answer

The relevant standard governing this situation is **SA 501 – Audit Evidence: Specific Considerations for Selected Items**, which lays down the auditor's responsibilities with respect to physical inventory verification.

**(a) Hyderabad Unit – Inventory Count Conducted Before Year-End (15th March 2025)**

As per **SA 501 Para 5**, when physical inventory counting is conducted at a date other than the date of the financial statements (i.e., 31st March 2025), the auditor must perform **roll-forward audit procedures** to obtain evidence that changes in inventory between the count date and the balance sheet date are properly recorded.

The additional audit procedures to be performed are:

**1. Attend the count on 15th March 2025** and evaluate management's count procedures, observe the count, perform test counts, and inspect the condition of inventory.

**2. Roll-forward reconciliation:** Obtain a reconciliation of inventory from 15th March to 31st March 2025 prepared by management and verify it by tracing:
- Purchases/receipts during the intervening period through Goods Receipt Notes (GRNs) and purchase invoices.
- Issues/sales/dispatches during the intervening period through delivery notes, dispatch records, and sales invoices.
- Any other adjustments such as returns, write-offs, or transfers.

**3. Test the intervening period transactions** for completeness, accuracy, and proper recording in the inventory ledger.

**4. Cut-off testing** at both 15th March (count date) and 31st …

Question 8

Discuss, how the auditors can identify and assessing the risk of material misstatement.

Accepted Answer

**Identifying and Assessing the Risk of Material Misstatement — SA 315**

As per **SA 315 – Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment**, CA Ram Manohar and his team must follow a structured approach to identify and assess risks before planning further audit procedures.

**1. Understanding the Entity and Its Environment**

The auditors must obtain an understanding of the following to identify risks:

(a) **Industry, Regulatory and Other External Factors:** Since the entity is in agro-products manufacturing — a listed company — the auditors must understand agricultural regulations, commodity price volatility, seasonal demand patterns, government support schemes (e.g., MSP policies), and SEBI listing requirements. These factors present inherent risks such as crop-cycle dependent revenues and subsidy income recognition.

(b) **Nature of the Entity:** This includes the entity's business model, organisational structure, sources of finance, investment activities, and accounting policies adopted. For an agro-products company, areas like inventory valuation (NRV of perishable goods), revenue recognition from commodity sales, and related party transactions with farmers/suppliers are key risk areas.

(c) **Objectives, Strategies and Related Business Risks:** Business risks arising from the entity's strategies (e.g., expansion, new product lines, export orientation) that may result in material misstatement must be id…

Question 9

CA students Srirang and Manga were discussing on the assurance, which the auditing services provide to the users, in the form of opinion on financial statements, by means of a written report. Such an assurance lends credibility to financial statements. You are required to state some of the aspects examined by the auditor, to ensure that the financial statements which are audited are not misleading.

Accepted Answer

The auditor examines several critical aspects of financial statements to ensure they are not misleading and to provide credible assurance to users:

**Existence and Occurrence** - The auditor verifies that assets, liabilities, equity balances, revenues, and expenses disclosed in the financial statements actually exist and have genuinely occurred during the period. This is accomplished through physical verification of assets, confirmation from third parties such as banks and debtors, and examination of supporting documentation like invoices and contracts.

**Completeness** - The auditor ensures that all material transactions, assets, liabilities, and equity items that should be recorded in the financial statements have been included. The auditor performs procedures to identify unrecorded transactions, undisclosed liabilities, and other potential omissions that could render the statements incomplete and misleading.

**Rights and Obligations** - The auditor verifies that assets shown in the balance sheet are legally owned or controlled by the entity and that liabilities genuinely represent present obligations of the company. The auditor examines title deeds for property, ownership documents, loan agreements, and lease documents to confirm the legal position.

**Valuation and Measurement** - The auditor examines whether assets, liabilities, and equity are valued in accordance with applicable Accounting Standards. This includes verification that inventory is valued at lower of cos…

Question 10

Takar and Co. Chartered Accountants were conducting an audit of an LLP. They have verified the Receivables and concluded that all the Receivables are genuine and recoverable. However, before the final completion of the audit, the auditors came to know of a severe financial crisis of one of the Receivables, M/s Raj Enterprises, whose outstanding account had become material to the overall Receivables figure as on the date of financial statements. CA Takar had discussions with the appropriate level of management to address the issue, and the auditors finally agreed to make provision for the same, as suggested by the auditor.

Accepted Answer

**Answer to Sub-part (i): Documentation of the Receivables Matter**

As per **SA 230 – Audit Documentation**, the auditor is required to prepare documentation that provides a sufficient and appropriate record of the basis for the auditor's report and evidence that the audit was planned and performed in accordance with SAs and applicable legal requirements.

In this specific case, where a material receivable of **M/s Raj Enterprises** has become doubtful due to a severe financial crisis discovered before final completion of the audit, **CA Takar** must document the following:

**Nature of the Significant Matter:** The auditor must record the nature of the significant matter — i.e., that M/s Raj Enterprises is facing a severe financial crisis and its outstanding balance has become material to the overall receivables figure as on the date of financial statements.

**Significant Professional Judgements:** SA 230 requires documentation of significant professional judgements made in reaching conclusions. Here, the auditor exercised judgement in determining that the receivable had become doubtful and that a provision was required. This judgement process must be recorded.

**Discussions with Management:** CA Takar had discussions with the appropriate level of management regarding the issue. The auditor must document the substance of these discussions — who was involved, when discussions took place, and the key points raised.

**Conclusion Reached:** The documentation must clearly sta…

Question 11

RK Associates, a leading Chartered Accountant firm were approached by RK Group, for appointment as statutory auditors for their new start-up company. It was learnt that some companies of the group faced raids by the Enforcement Directorate, in the recent past. The firm follows the SQC 1 and the firm's Quality control policy requires it to obtain vital information about the client before accepting an engagement. Specify the matters which the firm would consider for verifying the integrity of the client, to decide on acceptance of the engagement. Your answer should be in line with SQC 1.

Accepted Answer

**Matters to be Considered by RK Associates for Verifying Integrity of Client (as per SQC 1)**

**Standard on Quality Control 1 (SQC 1)** — *Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements* — requires a firm to establish policies and procedures for deciding whether to accept or continue a client relationship. The paramount consideration at the acceptance stage is the **integrity of the client**.

In the given case, since group companies of RK Group have faced Enforcement Directorate (ED) raids, RK Associates must exercise heightened professional scepticism. The following matters should be examined:

**(a) Background and Reputation of Principal Owners and Key Management**
The firm should gather information on the identity, reputation, and professional conduct of the **principal owners, key management personnel, and those charged with governance** of the new start-up. If the same promoters who were involved in the ED-raided group companies control this start-up, that is a significant integrity red flag.

**(b) Nature and Outcome of ED Raids on Group Companies**
The firm must ascertain the **specific nature of the Enforcement Directorate proceedings** — whether they relate to violations of FEMA, PMLA (Prevention of Money Laundering Act), or other economic offences — and the current status (under investigation, chargesheeted, settled). This directly bears on money laundering risk a…

Question 12

An auditor while verifying the sales during the year observed that the sales transactions in that year are more than 1 lakh in number. He wants to determine the sample size and its composition on the basis of his personal experience and knowledge and do the testing on his own judgment. Kindly advise him about the scientific approach to sampling and the method of sampling to be chosen in such a situation.

Accepted Answer

**Advice on Scientific Approach to Sampling and Appropriate Sampling Method**

**Issue with the Auditor's Proposed Approach:**
The auditor proposes to determine sample size and composition based purely on personal experience and judgment. This approach, while permissible to a limited extent, is **non-statistical sampling** (also called judgmental sampling). When the population is very large (over 1 lakh transactions), relying solely on personal judgment increases the risk of an unrepresentative sample, leading to incorrect audit conclusions. SA 530 – **Audit Sampling** (issued by the ICAI) requires that the auditor design a sample that provides a reasonable basis for drawing conclusions about the population.

**Scientific Approach to Sampling (as per SA 530):**
A **statistical sampling** approach should be adopted in this situation. Statistical sampling has the following characteristics:
1. **Random selection** of sample items, ensuring every item in the population has a known probability of selection.
2. **Use of probability theory** to evaluate sample results, including measurement of sampling risk.

By using statistical sampling, the auditor can:
- Objectively determine an appropriate sample size.
- Quantify and control **sampling risk** (the risk that the auditor's conclusion based on a sample differs from the conclusion if the entire population were tested).
- Ensure the sample is **representative** of the entire population of over 1 lakh sales transactions.

**Recommend…

Question 13

CA Taman is the auditor of a company dealing in trading of mobile accessories. This year the company has also started assembling mobile phones. The audit manager instructed the team to develop the audit programme based on the previous year's audit plan and proceed with the audit. However, CA Taman disagreed, explaining to the audit manager that before commencing the audit and throughout its course, he would plan the nature, timing and extent of direction and supervision for the engagement team members and the review of their work. Explain:

Accepted Answer

**Reference Standard: SA 300 – Planning an Audit of Financial Statements**

CA Taman is correct in disagreeing with the audit manager. Since the company has expanded from trading mobile accessories to also assembling mobile phones, there is a fundamental change in the nature of its business operations. This warrants a fresh audit plan rather than relying on the previous year's plan, as manufacturing/assembly activities introduce new risks (inventory valuation, cost accounting, production overheads) that were not present earlier.

**(i) Factors CA Taman will consider when planning the nature, timing, and extent of direction and supervision of engagement team members and review of their work:**

As per **SA 300**, the nature, timing, and extent of direction and supervision of engagement team members and review of their work vary depending on several factors:

**1. Size and Complexity of the Entity:** The company has now added an assembly/manufacturing division alongside its existing trading business. This increases the complexity of financial reporting — two distinct business lines must now be audited, each with different accounting treatments, risks, and internal controls.

**2. Areas of the Audit:** Different areas of the audit carry different risk levels. For the new assembly operations, areas such as inventory valuation (raw materials, WIP, finished goods), cost of production, fixed assets, and related internal controls are entirely new audit areas requiring additional expe…

Question 14

Following is the extract from the Balance Sheet of Ram Pvt. Ltd.: (i) Borrowings as on 31/03/2025 ₹ 10 Cr. (ii) Fresh borrowings from bank during the year ₹ 3 Cr. (iii) Borrowings repaid during the year ₹ 5 Cr. Pari passu clause has been created on the assets of the company. Further, borrowing limits have not been exceeded. From the above information, what audit procedures would you perform, to ensure that all borrowings reflected in the balance sheet, are valid claims owed to banks or other third parties?

Accepted Answer

**Audit Procedures for Verification of Borrowings — Ram Pvt. Ltd.**

The objective is to obtain sufficient appropriate audit evidence that borrowings of ₹10 Cr. reflected in the Balance Sheet as on 31/03/2025 represent valid claims owed to banks or other third parties. The following audit procedures would be performed:

**(a) Verification of Opening Balance and Reconciliation**

Verify the opening balance of borrowings by tracing it to the prior year audited financial statements. Reconcile the movement: Opening balance + Fresh borrowings (₹3 Cr.) − Repayments (₹5 Cr.) = Closing balance (₹10 Cr.), implying an opening balance of ₹12 Cr. Any unexplained difference must be investigated.

**(b) Obtaining Direct Confirmation from Banks (External Confirmation)**

As per **SA 505 (External Confirmations)**, send direct confirmation requests to all lending banks and financial institutions for the outstanding balance as on 31/03/2025. Confirmation should cover the outstanding principal, interest accrued, rate of interest, repayment schedule, and any security/charge created. This is the most reliable evidence for existence and accuracy of borrowings.

**(c) Inspection of Loan Agreements and Sanction Letters**

Inspect original loan sanction letters, loan agreements, and term sheets for each borrowing to verify: (i) the sanctioned limit and amount drawn, (ii) rate of interest, (iii) repayment terms, (iv) covenants including the **pari passu clause**, and (v) any restrictive conditions. E…

Question 15

State the auditor's duty regarding audit of LLP.

Accepted Answer

**Auditor's duties regarding audit of LLP** are prescribed under **Section 13 of the Limited Liability Partnership Act, 2008** and the **Limited Liability Partnership (Accounting) Rules, 2009**, as follows:

**Duty to Audit Accounts**: The auditor must audit the accounts of the LLP in accordance with the LLP Act, 2008 and the Accounting Rules, 2009. The auditor must carry out the audit as per **Standards on Auditing (SA)** issued by ICAI.

**Examination of Books and Records**: The auditor has the duty to examine the books of accounts and records of the LLP, including vouchers, documents, and other relevant evidence. The auditor must ascertain whether proper books of accounts have been maintained and whether accounts are properly kept.

**Right to Information and Explanation**: The auditor has the right to require partners and employees of the LLP to furnish such information, explanation, and clarification as may be necessary for the performance of audit duties. The auditor has unrestricted access to books, records, and documents of the LLP.

**Reporting on True and Fair View**: The auditor must report whether the financial statements show a true and fair view of the state of affairs and profit or loss of the LLP as on the date of the balance sheet and for the period ended on that date.

**Reporting on Compliance with Accounting Standards**: The auditor must report whether the accounts comply with the **Accounting Standards** notified under the LLP Rules and are in accordance …

Question 16

State the required disclosures for inventories as required under Schedule III (Part I) to the Companies Act, 2013.

Accepted Answer

**Disclosures for Inventories under Schedule III (Part I) to the Companies Act, 2013**

Schedule III (Part I) to the Companies Act, 2013 prescribes the format of the **Balance Sheet** and the **Statement of Profit and Loss** for companies. The following disclosures are required in relation to inventories:

**1. Classification of Inventories in the Balance Sheet**

Inventories are presented under **Current Assets** on the face of the Balance Sheet. In the notes to accounts, inventories must be sub-classified into the following categories:

(i) **Raw Materials** — materials and components held for use in the production process.

(ii) **Work-in-Progress (WIP)** — goods that are in the process of production but not yet complete.

(iii) **Finished Goods** — goods manufactured and ready for sale.

(iv) **Stock-in-Trade** — goods acquired for the purpose of trading (i.e., bought and sold without further processing).

(v) **Stores and Spares** — consumables, maintenance items, and spare parts held for operational use.

(vi) **Loose Tools** — small tools not capitalized as fixed assets.

(vii) **Others** — any other inventory not covered above; the **nature of such inventory must be specified**.

**2. Goods-in-Transit**

Goods-in-transit shall be **disclosed separately under the relevant sub-head** of inventories (e.g., Raw Materials-in-transit, Finished Goods-in-transit). They are not to be shown as a single combined line.

**3. Mode of Valuation**

The **method of valuation** adopte…

Question 17

A government department conducted an inventory audit and discovered that several items in inventory were found to be either damaged or obsolete, but they had not been removed from the records. There were no periodic physical verification reports of inventory, and the valuation of the materials in stock was outdated. Explain, how the audit of stores and inventories, as part of the expenditure audit, under the duties and responsibilities entrusted to the Comptroller and Auditor General (C&AG), can help address these issues.

Accepted Answer

**Audit of Stores and Inventories under C&AG — Addressing the Issues**

The **Comptroller and Auditor General of India (C&AG)** is vested with the responsibility of auditing government expenditure under **Article 149 of the Constitution of India**, read with the **Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971**. The audit of stores and inventories forms a critical component of **expenditure audit** conducted by C&AG, aimed at ensuring economy, efficiency, and effectiveness in the use of public resources.

**Nature and Scope of Stores and Inventory Audit:**

The audit of stores and inventories by C&AG covers examination of all materials, goods, and equipment purchased by government departments. This includes verifying that procurement, custody, issue, and disposal of stores conform to the prescribed rules and procedures.

**How C&AG Audit Addresses the Identified Issues:**

**(a) Damaged or Obsolete Items Not Removed from Records:**

C&AG audit specifically checks whether **survey and condemnation procedures** have been followed for unserviceable, damaged, or obsolete stores. The auditors examine whether the department has constituted **Board of Survey** at prescribed intervals to identify such items and whether condemned stores have been properly written off from the books with appropriate sanction. The audit would flag the existence of damaged/obsolete items still appearing in inventory records as a **lapse in internal control**, lead…

Question 18

State the required disclosures for inventories as required under Schedule III (Part I) to the Companies Act, 2013.

Accepted Answer

**Disclosures for Inventories under Schedule III (Part I) to the Companies Act, 2013**

Schedule III (Part I) to the Companies Act, 2013 governs the form and content of the Balance Sheet and Statement of Profit and Loss for companies. Inventories form part of **Current Assets** on the face of the Balance Sheet and are required to be disclosed as follows:

**Classification in the Balance Sheet**

Inventories shall be **sub-classified** and disclosed separately under the following heads:

1. **Raw Materials** — including goods in transit, which shall be disclosed separately.
2. **Work-in-Progress** — partly processed goods at the reporting date.
3. **Finished Goods** — including goods in transit, which shall be disclosed separately.
4. **Stock-in-Trade** — goods acquired for the purpose of trading, including goods in transit, which shall be disclosed separately.
5. **Stores and Spares** — consumable stores, fuel, packing materials, etc.
6. **Loose Tools** — small tools not capitalised as fixed assets.
7. **Others** — any other category of inventory not covered above.

**Goods-in-Transit Disclosure**

Goods-in-transit, wherever applicable, must be disclosed **separately** under each relevant sub-head (e.g., Raw Materials in transit, Finished Goods in transit). This ensures the reader understands which portion of inventory is physically in possession and which is in the pipeline.

**Mode of Valuation**

Schedule III mandates that the **mode of valuation** of inventories shall be …

Question 19

A government department conducted an inventory audit and discovered that several items in inventory were found to be either damaged or obsolete, but they had not been removed from the records. There were no periodic physical verification reports of inventory, and the valuation of the materials in stock was outdated. Explain, how the audit of stores and inventories, as part of the expenditure audit, under the duties and responsibilities entrusted to the Comptroller and Auditor General (CAG), can help address these issues.

Accepted Answer

**Audit of Stores and Inventories under CAG — Addressing Identified Issues**

The **Comptroller and Auditor General (CAG) of India** is empowered under the **Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971** to conduct audit of all expenditure from the Consolidated Fund of India, including audit of stores and inventories held by government departments. The audit of stores and inventories forms a critical component of **expenditure audit** and is governed by the guidelines issued by the CAG.

**Nature and Scope of Stores and Inventory Audit**

The CAG conducts audit of stores and inventories to ascertain whether: (a) stores have been purchased economically and utilised efficiently; (b) proper records of receipt, issue, and balance are maintained; and (c) physical verification has been conducted and discrepancies duly reported and resolved. The audit examines stores on the principles of **regularity, propriety, and efficiency**.

**Addressing the Issue of Damaged and Obsolete Items Not Removed from Records**

The CAG's audit specifically checks whether damaged, unserviceable, or obsolete items have been properly identified, written off, and removed from stock registers. The audit would verify: (i) whether a **Board of Survey** or a survey committee has been constituted periodically to identify such items; (ii) whether **write-off sanctions** have been obtained from the competent authority as required under General Financial Rules (GFR); an…

Question 20

CA Raj has just concluded the audit of a company and noted certain findings (exceptions in the IT environment and controls, which need to be assessed and reported accordingly. Specify, what points shall the auditor consider in assessing and reporting of audit findings in IT Environment and IT Controls.

Accepted Answer

An auditor assessing and reporting IT audit findings must consider multiple dimensions to ensure comprehensive evaluation and effective communication.

**Assessment of IT Findings:**

**1. Nature and Scope of Finding:** The auditor must clearly understand the IT control deficiency—its extent (single transaction, entire process, or multiple systems), the systems/modules involved, and the control objective(s) affected. Understanding whether the finding is a design deficiency or operating deficiency is critical.

**2. Root Cause Analysis:** Identifying the underlying reason for the control gap is essential. Root causes may include inadequate system configuration, insufficient access controls, lack of segregation of duties in IT systems, inadequate change management procedures, insufficient training, or absence of monitoring controls.

**3. Risk Assessment:** The auditor should evaluate the risk inherent in the finding—the likelihood of occurrence and potential impact (financial misstatement, data breach, business disruption, regulatory non-compliance, or reputational damage). Critical findings require immediate attention, while medium/low findings may have longer remediation timelines.

**4. Control Effectiveness:** Assess whether compensating controls exist that mitigate the risk or whether the control is completely absent or ineffective.

**5. Business Impact:** Evaluate the potential consequences for financial reporting accuracy, operational efficiency, data integrity, and co…

Question 21

Mentioned below are the threats to independence of auditors. Classify them, with reasons, into the appropriate type of threats viz. Advocacy threat, Intimidation threat, Familiarity threat, Self-interest threat. (ANY FOUR): (i) Close business relationship with an audit client; (ii) Auditors perform services that are themselves subject-matter of audit; (iii) Auditor deals with shares or securities of the audited company; (iv) Long association between specific auditors and their specific client counterparts; (v) Auditor deterred from acting objectively with an adequate degree of professional skepticism.

Accepted Answer

The following four situations (out of five) are classified under the appropriate type of threat to auditor independence as per the ICAI Code of Ethics (based on IESBA framework):

**(i) Close business relationship with an audit client → Self-interest Threat**
When an auditor enters into a close business relationship with the audit client (e.g., joint ventures, common financial interests), the auditor develops a personal or financial stake in the client's affairs. This creates a **self-interest threat** because the auditor may be inclined to favour the client to protect their own business interest, thereby compromising objectivity and independence.

**(iii) Auditor deals in shares or securities of the audited company → Self-interest Threat**
Holding a direct or material indirect financial interest in an audit client is a classic example of a **self-interest threat**. When the auditor owns shares or trades in the securities of the audited entity, any audit opinion that adversely impacts share value could financially harm the auditor. This creates a clear conflict of interest between the auditor's personal financial gain and their duty to report impartially.

**(iv) Long association between specific auditors and their specific client counterparts → Familiarity Threat**
A prolonged relationship between the audit engagement team members and the client personnel (e.g., CFO, management) leads to a **familiarity threat**. Over time, the auditor may develop excessive trust in the clie…

CA Inter Audit & Ethics

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Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap