Question 1

Which among the following assertions are discussed with respect to the employee benefit expenses?
(i) Measurement
(ii) Occurrence
(iii) Cutoff
(iv) Completeness
Choose the correct combination from below:

Accepted Answer

**Answer: (B)**

The case scenario explicitly details three audit procedures for employee benefit expenses:

1. **Occurrence (ii)**: "The employee benefit expenses recorded in the books were actually incurred during the relevant period" — This directly tests the occurrence assertion, verifying that recorded transactions actually happened.

2. **Completeness (iv)**: "The expenses in respect of all personnel have been accounted for" — This directly tests the completeness assertion, ensuring no employee benefit expense has been omitted from the records.

3. **Cutoff (iii)**: "The expenses recognised during the period are pertaining to the current accounting period" — This directly tests the cutoff assertion, confirming expenses are recorded in the correct accounting period.

**Measurement (i)** is NOT discussed. The case does not address the valuation or measurement of these benefit expenses — it focuses on whether they occurred, were complete, and were recorded in the correct period. Therefore, options (A), (C), and (D) which include measurement are incorrect.

Question 2

Case Scenario:
Joy Ltd., a company engaged in the business of trekking essentials, appointed CA Raj as the Statutory Auditor for the year. Due to the large volume of transactions of the company, the audit engagement team of CA Raj realized that it would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement Partner decided to apply following audit sampling techniques:
• Random number tables were used for selection of sample for power, telephone, and fuel charges.
• No structured method of sampling was used for office stationery.
• Transactions exceeding ₹ 8,000 were selected for travel expenses.
• The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Suresh, one of the team members, com…

Accepted Answer

**Answer: (c)**

(i) **Power, telephone and fuel charges** — Random number tables were used, which is the defining characteristic of **Random Sampling** (also called Random Number Table Selection under SA 530).

(ii) **Office Stationery** — No structured method was used, which describes **Haphazard Sampling**, where the auditor selects items without any structured technique but avoids conscious bias.

(iii) **Travel expenses** — Transactions exceeding ₹8,000 were selected, meaning items are chosen based on their monetary value/size. This is **Monetary Unit Sampling (MUS)**, which gives higher probability of selection to items with higher monetary values.

(iv) **Sales** — The first 200 invoices from July were selected, i.e., a sequential block of items. This is **Block Sampling**, where a contiguous block of items is selected from the population.

Question 3

Whether disclosure of dividend under the liability head during the year 2022-23 is appropriate?

Accepted Answer

**Answer: (C)**

The treatment of recognizing the dividend as a liability in the year 2022-23 is **not appropriate**. The dividend for the year 2022-23 was declared on 15.04.2023, which is **after the balance sheet date of 31.03.2023**. This is a critical timing distinction.

Under **Ind AS 110 (Events After the Reporting Period)**, events occurring after the balance sheet date are classified as either adjusting or non-adjusting events. A dividend declared after the balance sheet date is a **non-adjusting event** because it does not provide evidence of conditions existing at the balance sheet date; rather, it represents a decision taken after that date.

According to the recognition criteria in **Ind AS 32 (Financial Instruments - Presentation)** and principles under the **Companies Act 2013**, a dividend is recognized as a liability **only when it is declared by the shareholders**. Since the declaration occurred post-balance sheet date, no liability existed as at 31.03.2023.

However, the declaration is a material event that affects shareholders and requires **disclosure in the notes to the financial statements** to ensure users are informed of this obligation. This disclosure provides transparency without misrepresenting the financial position at the balance sheet date.

Therefore, the correct treatment is: **No recognition as a liability in the balance sheet for 2022-23, but disclosure in the notes to accounts as a material non-adjusting event occurring after the reporting…

Question 4

Case Scenario:
Joy Ltd., a company engaged in the business of trekking essentials, appointed CA Raj as the Statutory Auditor for the year. Due to the large volume of transactions of the company, the audit engagement team of CA Raj realized that it would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement Partner decided to apply following audit sampling techniques:
• Random number tables were used for selection of sample for power, telephone, and fuel charges.
• No structured method of sampling was used for office stationery.
• Transactions exceeding ₹ 8,000 were selected for travel expenses.
• The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Suresh, one of the team members, com…

Accepted Answer

**Answer: (d) Substantive analytical procedure.**

Mr. Suresh compared salary expenses of the current year with those of the previous five years and further corroborated the finding by comparing the increase with the number of employees. This is a classic **substantive analytical procedure** as defined under **SA 520 (Analytical Procedures)**, which involves evaluating financial information through analysis of plausible relationships among both financial and non-financial data. It is substantive in nature (aimed at detecting material misstatements) and relies on comparisons and ratio analysis rather than examining individual transactions (test of details) or evaluating internal controls (test of controls).

Question 5

Krish pointed out that the method followed to obtain debtor confirmation in the previous year was not in accordance with SA 505. Therefore, M/s Saha & Associates should reperform the same in the correct manner. Which of the following statements is correct regarding SA 505?

Accepted Answer

**Answer: (A)**

SA 505 (External Confirmations) establishes specific requirements for obtaining confirmations from third parties. The auditor must **directly obtain confirmations from debtors**, not through the client. This is a fundamental requirement because confirmations obtained by the client lack the necessary independence and reliability that external audit evidence demands.

Regarding the scope of confirmations, SA 505 requires a two-tier approach: (1) **all significant account balances** as at the balance sheet date must necessarily be confirmed by the auditor, and (2) for **smaller or non-significant outstanding balances**, the auditor may apply random sampling or other appropriate audit procedures instead of confirming every balance.

Option (A) correctly captures both requirements. Option (B) is incorrect because SA 505 prohibits client-obtained confirmations. Option (C) fails to distinguish between significant balances (which must all be confirmed) and smaller balances (where sampling is permitted). Option (D) incorrectly suggests the auditor and client can obtain confirmations interchangeably based on availability, which violates SA 505's independence principle.

Question 6

Case Scenario:
Joy Ltd., a company engaged in the business of trekking essentials, appointed CA Raj as the Statutory Auditor for the year. Due to the large volume of transactions of the company, the audit engagement team of CA Raj realized that it would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement Partner decided to apply following audit sampling techniques:
• Random number tables were used for selection of sample for power, telephone, and fuel charges.
• No structured method of sampling was used for office stationery.
• Transactions exceeding ₹ 8,000 were selected for travel expenses.
• The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Suresh, one of the team members, com…

Accepted Answer

**Answer: (b)**

As per **SA 501 (Audit Evidence — Specific Considerations for Selected Items)**, when inventory is held by a third party, the auditor's responsibilities include: obtaining confirmation from the third party about quantity and condition, requesting physical inspection access, and reviewing the terms of the agreement between the company and the third party. However, performing an **independent valuation of inventory based solely on the company's internal records** is NOT a prescribed procedure under SA 501 for third-party held inventory. Valuation is a separate audit concern, and basing it solely on internal records without external corroboration would not even constitute appropriate audit evidence. Options (a), (c), and (d) are all valid procedures explicitly contemplated under SA 501 for third-party inventory situations.

Question 7

Which assertion has been affected in the case of fixed assets where addition of ₹50 lakhs was supported by sufficient audit evidence but some invoices were not in the name of the company?

Accepted Answer

**Answer: (B)**

When fixed assets addition of ₹50 lakhs is supported by sufficient audit evidence but the invoices are not in the name of the company, the **Rights and Obligations** assertion has been affected.

The Rights and Obligations assertion addresses whether the entity has the legal right to own, control, and utilize the assets. While the existence of the asset is established through sufficient audit evidence, the fact that invoices are not in the company's name raises a critical question: Does the company actually have the legal right to own and control these assets?

If purchase invoices are not in the company's name, it suggests the asset may have been purchased in another name or through a third party. This creates uncertainty about the company's legal ownership rights. There could be potential claims by the actual invoice holder, or the asset may not legally belong to the company despite being in its possession or control.

Under SA 500 (Audit Evidence), this anomaly directly affects the Rights and Obligations assertion as per the audit assertions framework under SA 315 (Identifying and Assessing Risks of Material Misstatement).

Question 8

Case Scenario:
Joy Ltd., a company engaged in the business of trekking essentials, appointed CA Raj as the Statutory Auditor for the year. Due to the large volume of transactions of the company, the audit engagement team of CA Raj realized that it would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement Partner decided to apply following audit sampling techniques:
• Random number tables were used for selection of sample for power, telephone, and fuel charges.
• No structured method of sampling was used for office stationery.
• Transactions exceeding ₹ 8,000 were selected for travel expenses.
• The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Suresh, one of the team members, com…

Accepted Answer

**Answer: (a) Inspection.**

CA Raj requested the management to provide all active rent agreements for detailed examination. Examining documents or records (whether internal or external) is the audit procedure known as **Inspection**, as defined under **SA 500 – Audit Evidence**. Inspection of documents provides audit evidence of varying degrees of reliability depending on their nature and source. Since rent agreements are external documents, their inspection provides reliable audit evidence regarding the existence and terms of lease arrangements.

Question 9

Cash and cash equivalents were not properly classified by the client. Which of the following is an incorrect disclosure of the same?

Accepted Answer

**Answer: (D)**

Earmarked balances with banks are balances that are restricted or set aside for specific purposes and are not freely available for the entity's general use. According to Ind AS 7, cash and cash equivalents comprises cash on hand and demand deposits with banks that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

Earmarked balances (such as those designated for unpaid dividends, unclaimed deposits, or other restricted purposes) do not meet this definition because they lack the characteristic of being freely available. These balances are restricted in nature and therefore must be separately classified and disclosed, typically under current assets or as a separate line item with appropriate disclosure, rather than being included within "cash and cash equivalents."

The other options—balances with banks, cheques and drafts on hand, and cash on hand—are all appropriate components of cash and cash equivalents when they are freely available and convertible without restriction.

Question 10

Case Scenario:
Joy Ltd., a company engaged in the business of trekking essentials, appointed CA Raj as the Statutory Auditor for the year. Due to the large volume of transactions of the company, the audit engagement team of CA Raj realized that it would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement Partner decided to apply following audit sampling techniques:
• Random number tables were used for selection of sample for power, telephone, and fuel charges.
• No structured method of sampling was used for office stationery.
• Transactions exceeding ₹ 8,000 were selected for travel expenses.
• The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Suresh, one of the team members, com…

Accepted Answer

**Answer: (d)**

The type of products Joy Ltd. manufactures (trekking essentials) is **not** a factor that influences the auditor's judgment on the sufficiency of audit evidence. As per **SA 500 – Audit Evidence**, the sufficiency of audit evidence is influenced by factors such as the **materiality of the transactions**, the **risk of material misstatement**, and the **size and characteristics of the population** being tested. The nature of the business product (trekking essentials) is a business characteristic but does not directly determine how much audit evidence is required — it is irrelevant to the quantity assessment of audit evidence.

Question 11

CA Chatur provides accounting and book keeping services to Shiv Ganga Limited. He is also offered an audit of the accounts to the Shiv Ganga Limited. Which threat to independence may be involved in accepting such an engagement?

Accepted Answer

**Answer: (B)**

When CA Chatur provides accounting and bookkeeping services to Shiv Ganga Limited, he is directly involved in preparing and recording the financial transactions. Subsequently, accepting an audit of the same company's accounts would require him to evaluate and audit the financial statements he himself prepared. This creates a **self-review threat** — a situation where an auditor must evaluate the results of a previous professional judgment made in a non-audit capacity (accounting services). According to the Code of Ethics for Chartered Accountants in India (ICAI), a self-review threat arises when an auditor reviews work performed by himself in another capacity, compromising the ability to maintain professional skepticism and independence. The other options are not the primary concern here: self-interest threat relates to financial interests; familiarity threat arises from close relationships over time; and advocacy threat occurs when promoting the client's position.

Question 12

CA Sumit, during the process of assembling the audit file after the completion of the audit, briefed his team on the changes to be made in the audit documentation. Which of the following changes can be made during the audit file assembly stage?
A. Sorting, collating and cross referencing of working papers.
B. Deleting or discarding superseded documents.
C. Recalculation of depreciation.
D. Recalculation of Interest on loans.
E. Signing off of completion checklist relating to file assembly.
(a) A, B and E
(b) C and D
(c) A, C and D
(d) A, C, D and E

Accepted Answer

**Answer: (a) A, B and E**

As per **SA 230 – Audit Documentation**, the completion of the assembly of the final audit file after the date of the auditor's report is purely an **administrative process**. It does **not** involve performing new audit procedures or drawing new conclusions. The changes permissible during this stage are limited to administrative in nature, specifically: **(A) Sorting, collating, and cross-referencing of working papers**, **(B) Deleting or discarding superseded documents**, and **(E) Signing off on completion checklists relating to the file assembly process**. Recalculations such as depreciation (C) or interest on loans (D) constitute substantive audit procedures and cannot be performed during the file assembly stage — such work must be completed before the date of the auditor's report.

Question 13

CA Sargun is conducting statutory audit of branch of KBC Bank. During the course of audit, it is noticed that one borrower has availed a housing loan and a car loan from the branch. Housing loan EMIs are overdue for 120 days as on date of Balance sheet. Car loan EMIs are overdue for 60 days as on date of Balance sheet. Which of the following statements is appropriate?

Accepted Answer

**Answer: (C)**

Both Housing loan as well as car loan should be classified as "Non-Performing Assets" in accordance with RBI norms on asset classification.

**Explanation:** Under RBI norms for asset classification, an advance is classified as a Non-Performing Asset (NPA) when principal or interest payment remains outstanding for more than 90 days. The Housing Loan with EMIs overdue for 120 days clearly qualifies as NPA as it exceeds the 90-day threshold.

However, the critical principle is that when a **borrower has multiple advances with the bank and one of them becomes NPA, all advances of that borrower must be classified as NPA**, regardless of the individual status of each advance. This is applied as a prudent classification measure to reflect the true credit risk associated with the borrower.

In this case, since the Housing Loan (120 days overdue) is classified as NPA, and both loans are with the same borrower, the Car Loan must also be classified as NPA despite being only 60 days overdue. The bank cannot classify some advances as Standard while others are NPA when they belong to the same borrower and one has already become NPA.

Question 14

CA Rao is conducting an audit for ABC Ltd., a large client. He is informed by the client's CFO that if they report certain deficiencies, the auditor's firm may not be considered for future engagements. Which type of threat does this scenario represent?
(a) Familiarity Threat
(b) Intimidation Threat
(c) Self-interest Threat
(d) Advocacy Threat

Accepted Answer

**Answer: (b) Intimidation Threat**

An **Intimidation Threat** arises when an auditor is deterred from acting objectively by actual or perceived pressures, including attempts to exercise undue influence. Here, the CFO's implicit threat of withdrawing future engagements if deficiencies are reported is a classic example of intimidation, as it coerces CA Rao into suppressing audit findings to protect the firm's commercial interest. This is governed under the **Code of Ethics issued by ICAI** (aligned with IESBA Code), which identifies intimidation as one of the five fundamental threats to auditor independence.

Question 15

Sagar Finance Corporation Limited is a government company. The audit of the company is conducted by statutory auditors appointed by Comptroller and Auditor General of India (C&AG). Who is empowered to conduct "supplementary audit" of Sagar Finance Corporation Ltd.?

Accepted Answer

**Answer: (B)**

The C&AG (Comptroller and Auditor General of India) is empowered to conduct supplementary audit of government companies under Section 139B of the Companies Act, 2013. This section specifically provides: "In case of a Government company, the Comptroller and Auditor General may, in addition to the audit conducted by the statutory auditor, conduct such supplementary audit of the accounts of the company as he thinks fit, at such intervals as he may determine."

While the C&AG may delegate the actual conduct of the supplementary audit to other auditors or officials from the C&AG's office, the statutory empowerment and authority to conduct supplementary audit is vested exclusively in the C&AG. The appointment of other auditors for this purpose would be done by the C&AG, not by the Central Government or Ministry of Corporate Affairs.

Question 16

CA Kaushal, the statutory auditor of Femo Ltd., obtained trade receivables ageing report, analysed it and identified doubtful debts during the audit of accounts receivable balances. Which Balance Sheet assertion is CA Kaushal intended to check?
(a) Valuation
(b) Rights and obligations
(c) Existence
(d) Completeness

Accepted Answer

**Answer: (a) Valuation**

When an auditor analyses the trade receivables ageing report to identify doubtful debts, the auditor is assessing whether receivables are carried at the appropriate net realisable value (i.e., after deducting provision for doubtful debts). This directly relates to the **Valuation** assertion, which addresses whether assets are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded. Existence would involve confirming that the receivables actually exist; Completeness would ensure no receivables are omitted; Rights and Obligations would verify the entity's ownership of those receivables.

Question 17

Kriti, a CA student, has joined articles in a reputed audit firm. She considers audit engagement to be an "assurance engagement". Her understanding is that audit engagement is the only kind of assurance engagement in which practitioner gives a written assurance report in appropriate form. However, her friend Somaya does not agree with her. She is of the view that assurance engagements are not restricted to audit alone. Besides, Somaya also thinks that assurance engagements can also relate to matters other than historical financial information. Whose view appears to be correct? State with reasons.

Accepted Answer

**Somaya's view is correct.**

**Analysis of the Positions:**

Kriti's understanding is partially correct but incomplete. She is right that audit is an assurance engagement, and written assurance reports are issued. However, her conclusion that audit is the *only* assurance engagement is incorrect.

**Assurance Engagements are Not Limited to Audit Alone:**

According to SA 100 (Assurance Engagements), an assurance engagement is defined as an engagement in which a practitioner is engaged to issue a written report expressing a conclusion about the reliability of a subject matter assertion. Assurance engagements include:

1. **Audit Engagements** — provide high level of assurance (reasonable assurance) on historical financial statements
2. **Review Engagements** — provide moderate level of assurance on financial statements
3. **Other Assurance Engagements** — various engagements providing different levels of assurance on diverse matters

All these engagements involve issuance of a written assurance report in appropriate form. Therefore, Kriti's claim that only audit engagements include written reports is inaccurate; all assurance engagements do.

**Subject Matter is Not Restricted to Historical Financial Information:**

Somaya is also correct that assurance engagements can relate to matters beyond historical financial information. Per SA 100, assurance engagements can concern:

1. **Historical Financial Information** — traditional financial statement audits and reviews
2. **Comp…

Question 18

RST Ltd., a retail company, has set up internal controls requiring all invoices to be stamped and signed by an authorised person in "Goods Receiving Section" of the company stating the date and time of receiving goods in premises to ensure that only those purchase bills are produced for payment for which goods have been actually received. During the audit, the auditor finds that two employees – a purchasing manager and an accounts clerk – have worked together to bypass this control, submitting fake invoices that resulted in payments for goods that were never received. You are required to state the objectives of an audit, as per SA 200, when it comes to ensuring the reliability of financial statements? Also explain, why auditor can provide only reasonable, rather than absolute, assurance th…

Accepted Answer

**Objectives of an Audit as per SA 200 (Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing)**

As per **SA 200**, the overall objectives of an independent auditor when conducting an audit of financial statements are:

**1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement** — whether due to fraud or error — thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework (such as Ind AS or AS).

**2. To report on the financial statements and communicate** as required by the SAs, in accordance with the auditor's findings.

The purpose of obtaining reasonable assurance is to enhance the degree of confidence of intended users in the financial statements. The auditor's opinion is expressed in terms of whether the financial statements give a **true and fair view** (or present fairly, in all material respects). This opinion covers both **fraud** (intentional misstatement) and **error** (unintentional misstatement).

**Why Only Reasonable Assurance — Not Absolute Assurance?**

SA 200 explicitly recognises that an audit conducted in accordance with SAs provides only **reasonable assurance**, which is a **high but not absolute level of assurance**. This limitation exists due to inherent limitations of an audit. In the context of the …

Question 19

CA N, engagement partner of LPS & Associates, is planning for audit of a large company. As part of preliminary engagement activities being performed in this regard, he wants to ensure that compliance with independence requirements is adhered. How shall he form a conclusion that audit firm complies with independence requirements?

Accepted Answer

To form a conclusion that the audit firm complies with independence requirements during preliminary engagement activities, CA N should follow a systematic approach as outlined in SA 220 and SA 300.

**Assessment of Independence Standards**: First, the engagement partner must identify and understand the relevant independence requirements applicable to the engagement. These are derived from the Code of Ethics for Professional Accountants issued by ICAI, which requires auditors to be independent in fact and in appearance. The partner should determine the scope of the audit firm (including the network firm, if applicable) and identify all parties to whom independence requirements apply.

**Identification of Related Parties and Relationships**: CA N should conduct a thorough enquiry to identify whether the audit firm, its partners, or staff members have any financial, business, personal, or other relationships with the entity to be audited or its related parties. This includes examining existing clients, previous engagements, and any potential conflicts of interest. The firm should maintain a database or registry of relationships that may affect independence.

**Evaluation of Threats to Independence**: The engagement partner must evaluate whether there are any threats to independence such as: self-interest threat (financial interests, loans, contingent fees), self-review threat (reviewing the firm's own work), advocacy threat (promoting the client's position), familiarity threat (…

Question 20

During the audit of ABC Ltd., a medium-sized manufacturing company, the engagement partner is responsible for directing and supervising the work of the engagement team. The team includes both experienced members and several new trainees. Additionally, certain areas of the audit have been identified as high-risk, such as revenue recognition and inventory valuation, due to recent changes in ABC Ltd.'s accounting policies. What factors should the engagement team members consider when determining the nature, timing, and extent of direction, supervision, and review of the engagement team's work?

Accepted Answer

**Direction, Supervision, and Review of Engagement Team Work**

The requirement to direct, supervise, and review engagement team work is governed by **SA 220 – Quality Control for an Audit of Financial Statements** and **SA 300 – Planning an Audit of Financial Statements**. The engagement partner must ensure that the work is performed in accordance with professional standards and regulatory requirements, and that the audit report issued is appropriate.

**Factors Determining Nature, Timing, and Extent of Direction, Supervision, and Review:**

**1. Size and Complexity of the Entity**
ABC Ltd. is a medium-sized manufacturing company. The complexity of its operations — particularly around revenue recognition and inventory valuation — increases the need for closer supervision. Complex areas require more frequent partner or senior review at interim and final stages, not just at the end.

**2. Assessed Risks of Material Misstatement**
Where risks are assessed as **high**, as in the case of revenue recognition (changes in accounting policy) and inventory valuation, the nature and extent of direction and review must be enhanced. The engagement partner should personally review working papers, audit evidence, and conclusions for these high-risk areas. The timing of review should be earlier — not deferred to year-end.

**3. Competence and Experience of Engagement Team Members**
The team includes both experienced members and **new trainees**. Less experienced staff require:
- More detail…

Question 21

Companies are increasingly using data analytics for managing their operations. Auditors can also obtain good results by using data analytics. What are the tools and techniques used by auditors in applying the principles of Data Analytics and in which areas data analytics can be used by auditors?

Accepted Answer

Data analytics in auditing involves using technology tools and statistical techniques to analyze large volumes of transaction data, enabling auditors to examine entire populations rather than relying solely on sample-based testing. This enhances audit quality, efficiency, and fraud detection capabilities.

**Tools and Techniques Used in Data Analytics Auditing:**

**Audit Software and Extraction Tools**: ACL (Audit Command Language) and IDEA (Interactive Data Extraction and Analysis) are primary Computer Assisted Audit Techniques (CAATs) that extract data directly from ERP systems, databases, and spreadsheets. These tools facilitate data transformation, consolidation from multiple sources, and preparation for analysis in standardized formats.

**Statistical Analysis Techniques**: Descriptive statistics (mean, median, standard deviation, variance) establish baseline characteristics of transaction populations. Comparative analysis across periods identifies trends and deviations. Ratio analysis assesses relationships between financial statement items and highlights anomalies.

**Sampling Methodologies**: Statistical sampling techniques including monetary unit sampling, stratified sampling, and systematic sampling enable auditors to evaluate large populations with measurable precision and risk assessment, supporting risk-based audit planning.

**Benford's Law Analysis**: Digital analysis examines whether the distribution of leading digits in transaction amounts conforms to Benfor…

Question 22

The auditor of EFG Ltd., a company engaged in the Tours & Travel business, needs to obtain an understanding of the company's control environment. To do this, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control.
What is included in control environment? Also explain the elements of control environment.

Accepted Answer

**Control Environment — Meaning and Elements**

As per **SA 315 (Revised), "Identifying and Assessing the Risks of Material Misstatement"**, the **control environment** is the foundation of an entity's internal control system. It sets the tone of an organisation, influencing the control consciousness of its people. It is the basis for all other components of internal control.

The auditor of EFG Ltd. must obtain an understanding of the control environment and evaluate whether management has created and maintained a **culture of honesty and ethical behaviour**, and whether the strengths in the control environment elements collectively provide an **appropriate foundation** for the other components of internal control.

**What is Included in the Control Environment?**

The control environment encompasses the **attitudes, awareness, and actions** of management and those charged with governance concerning the entity's internal control and its importance. It includes:
- The governance and management functions
- The attitudes, awareness, and actions of management and those charged with governance regarding internal control and its importance in the entity

**Elements of Control Environment**

**(1) Communication and Enforcement of Integrity and Ethical Values:**
The effectiveness of internal controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them. Management of EFG Ltd. should communicate its values through codes of conduct,…

Question 23

Quality Products Limited is engaged in manufacturing of bicycles. As part of manufacturing activities, it sends raw material to some business entities and procures finished components from them. As on 31st March 2024 inventories lying with such business entities are material. Being statutory auditor of Quality Products Limited, how will you obtain sufficient appropriate audit evidence regarding existence and condition of inventories lying with such business entities?

Accepted Answer

As per **SA 501 'Audit Evidence - Specific Items'**, when inventory is held by third parties, the auditor must obtain sufficient appropriate audit evidence regarding existence and condition. The following systematic approach should be adopted by the statutory auditor of Quality Products Limited:

**Understanding the Arrangement** The auditor should first obtain a clear understanding of the nature of the arrangement with third parties. Since raw materials are sent for processing/component manufacturing, the auditor must determine whether Quality Products Limited retains ownership, the terms of custody, processing timelines, and responsibility for loss or damage.

**Risk Assessment** Specific risks arising from third-party inventory custody include: (i) existence risk—whether inventory actually exists; (ii) condition risk—deterioration or damage during custody; (iii) ownership risk—whether Quality Products Limited has legal title; and (iv) completeness risk—whether all inventory with third parties is recorded. These risks should be assessed as inherent and control risks in the audit risk model.

**Audit Procedures** (1) **Direct Confirmation from Third Parties**: Obtain written confirmations directly from the business entities holding inventory, requesting certification of quantity held, description, specification, current condition, ownership details, and any liens or claims. Confirmations should be requested and received by the auditor, not management. (2) **Review of Documen…

Question 24

CA Mukul is the external auditor of Beige Ltd., a large company, engaged in the manufacturing of fast-moving consumer (FMCG) goods. After assessing the internal audit function of the company, CA Mukul decided to use the internal auditor of the company to provide direct assistance. In this context, what is meant by direct assistance under relevant Standard on Auditing? Also comment whether prior to using internal auditor for direct assistance for the purpose of audit, CA Mukul is required to obtain any written agreements or not. Give examples of procedures in which CA Mukul shall not use an internal auditor to provide direct assistance.

Accepted Answer

**Direct Assistance under SA 610 (Using the Work of Internal Auditors)**

**Meaning of Direct Assistance**

Under **SA 610 (Revised)**, "direct assistance" refers to the use of internal auditors to perform audit procedures under the direction, supervision, and review of the external auditor. This is distinct from using the work already performed by the internal audit function — in direct assistance, the internal auditors act under the external auditor's direct instructions to carry out specific audit tasks on the external auditor's behalf. The external auditor remains solely responsible for the audit opinion expressed.

CA Mukul, as the external auditor of Beige Ltd., may ask internal auditors to assist in tasks such as performing tests of controls, substantive procedures, and other evidence-gathering activities, provided the conditions under SA 610 are satisfied.

**Requirement of Written Agreement before Using Direct Assistance**

Yes, **CA Mukul is required to obtain written agreements** before using internal auditors for direct assistance. SA 610 requires that the external auditor obtain agreement from two parties:

1. **From an authorized representative of the entity (i.e., Beige Ltd.):** A written agreement that the internal auditors providing direct assistance will be allowed to follow the external auditor's instructions without interference, and that the entity will not take any action against the internal auditors based on the work they perform for the external audit…

Question 25

The financial statements of XYZ Limited reflects long-term borrowings from the banks, financial institutions, leasing, and hire purchase companies. Additionally, the company has issued debentures to its 1000 members to raise funds in accordance with the provisions of the Companies Act, 2013. The money raised by issuing debentures is also reflected in long-term borrowings. As the statutory auditor of XYZ Limited, CA X wants to verify that all borrowings on the balance sheet represent valid claims by banks or other third parties. Suggest a few audit procedures in this regard.

Accepted Answer

As the statutory auditor of XYZ Limited, CA X should adopt a comprehensive approach to verify the authenticity and validity of all long-term borrowings and debentures. The audit procedures should systematically address existence, completeness, authorization, and proper disclosure of these liabilities.

Regarding **bank borrowings and financial institution loans**, CA X should obtain direct confirmations from all banks and financial institutions as the most reliable audit evidence under SA 505. These confirmations should specify outstanding balances, interest rates, repayment terms, maturity dates, and details of security provided. Original loan agreements, sanction letters, and promissory notes should be reviewed to verify authorized amounts and all covenants or restrictions. Security documents such as mortgage deeds and hypothecation agreements must be examined to ensure assets are properly pledged. Bank confirmations should be reconciled with general ledger balances and bank statements to identify discrepancies. The auditor should verify compliance with all loan covenants and conditions and check for any violations that might affect liability classification.

For **debenture verification**, CA X should obtain and carefully review the debenture trust deed governing issuance, terms, and redemption obligations. The Board authorization for debenture issuance must be verified through resolutions, ensuring compliance with borrowing power limits under Companies Act, 2013, Section …

Question 26

During the audit of Rapid Industries Private Limited, CA Akshat notices that inventories of raw materials & consumables and work-in-progress amounting ₹ 2.50 crores and ₹ 0.25 crores appear in the financial statements of the company as on March 31st, 2024. He wants to verify that the above-mentioned inventories have been valued appropriately and as per generally accepted accounting policies and practices. How should he proceed to verify the above?

Accepted Answer

**Verification of Inventory Valuation — Raw Materials & Consumables and Work-in-Progress**

The applicable accounting standard governing inventory valuation is **AS 2 — Valuation of Inventories** issued by the ICAI. As per AS 2, inventories are to be valued at the **lower of cost or net realisable value (NRV)**. CA Akshat must design audit procedures to verify compliance with this principle for both categories of inventory.

**General Audit Approach**

CA Akshat should begin by obtaining and reviewing the **inventory valuation policy** disclosed in the accounting policies note of the financial statements. He should assess whether the policy is consistent with AS 2, has been applied consistently with the prior year, and is appropriate for the nature of the business.

He should also refer to **SA 501 — Audit Evidence — Specific Considerations for Selected Items**, which provides guidance on obtaining sufficient appropriate audit evidence regarding the existence, condition, and valuation of inventories. Attendance at physical stock-taking and review of inventory count procedures are integral to this.

**Verification of Raw Materials & Consumables (₹2.50 crores)**

**1. Ascertainment of Cost:** CA Akshat should verify that the cost of raw materials includes **purchase price, duties and taxes, freight inward, and other directly attributable costs** as prescribed under AS 2, net of trade discounts and rebates. He should vouch a sample of purchase invoices, freight bills, and custom…

Question 27

An important factor in determining the form, content and extent of audit documentation of significant matters is the extent of professional judgment exercised in performing the work and evaluating the results. Explain stating clearly the examples of significant matters.

Accepted Answer

**SA 230: Audit Documentation of Significant Matters and Professional Judgment**

**Relationship between Professional Judgment and Documentation**

SA 230 (Auditor Documentation) establishes that the form, content, and extent of audit documentation are significantly influenced by the extent of professional judgment exercised during the audit. Where an auditor exercises substantial professional judgment in performing audit procedures or evaluating audit evidence—particularly regarding significant matters—the documentation must be correspondingly comprehensive and detailed. This requirement ensures that:

(1) The rationale for the auditor's conclusions is transparent and supportable
(2) The work performed and evidence evaluated are clearly demonstrated
(3) The basis for the audit opinion is adequately supported
(4) Another auditor can understand the nature, timing, extent, and results of work performed

When significant matters involve high levels of professional judgment, the auditor must document the nature of the matter, the audit procedures performed, the evidence obtained, and the conclusions reached. The documentation should explain how the auditor addressed the complexity and uncertainty inherent in these matters.

**Key Principle:** Greater complexity and judgment → Greater documentation requirements. Simple, routine matters require less extensive documentation, while matters requiring substantial judgment demand detailed contemporaneous documentation explaining the aud…

Question 28

CA Ripun completed the audit of a listed company, and the audit report was issued on July 17th, 2024. However, he had not properly organized the audit working papers, including records of discussions with management, audit procedures performed, and conclusions reached. More than six months after issuing the report, he received a letter from the regulator in connection with audit of the company requesting him to share copy of audit file. In a hurry, CA Ripun quickly assembled the audit file, adding some papers he thought were necessary, but he used the current date on these newly added documents. He then sent the audit file to the regulator. Discuss the issues involved related to "audit documentation" and assembling of the final audit file in this case.

Accepted Answer

The case involves multiple violations of **SA 230 – Audit Documentation** issued by the ICAI, and raises serious concerns about professional conduct.

**Issue 1: Failure to Properly Organize Audit Documentation**

SA 230 requires the auditor to prepare audit 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 applicable Standards on Auditing and legal/regulatory requirements. CA Ripun failed to properly organize records of discussions with management, audit procedures performed, and conclusions reached — all of which are mandatory components of audit documentation under SA 230. This is a fundamental breach of his documentation obligations, regardless of the timing of the regulator's request.

**Issue 2: Failure to Complete Assembly Within the Prescribed Time**

SA 230 requires the auditor to complete the assembly of the **final audit file on a timely basis after the date of the auditor's report**. The ICAI guidance under SA 230 specifies that this assembly should ordinarily be completed **within 60 days** of the date of the auditor's report. The audit report was issued on **July 17, 2024**, meaning the final audit file should have been assembled by approximately **September 15, 2024**. CA Ripun assembled the file only after receiving the regulator's letter — more than **six months** after the report date — which is a clear violation of this requirement.
…

Question 29

CA Manoj is the statutory auditor of a company. He has completed the audit and issued the audit report dated June 30, 2024. Before signing the audit report, written representations dated June 29, 2024, were obtained from the management of the company. Discuss the significance of the date of written representations. Also state whether the written representations obtained on June 29, 2024 is appropriate or not.

Accepted Answer

**Significance of the Date of Written Representations**

According to **SA 580: Written Representations**, the date of written representations is critical for the following reasons:

**1. Establishes the Audit Period Covered**: The date determines the period up to which management's representations apply. It clarifies that management has provided assurance regarding the financial statements and matters only up to that specific date.

**2. Demonstrates Management's Accountability**: The date reflects the point as of which management assumes responsibility and accountability for the accuracy, completeness, and appropriateness of the financial statements and related disclosures. It confirms management's knowledge and explicit acknowledgment as of that date.

**3. Evidence of Audit Completion Timing**: The date serves as evidence that written representations were obtained **before** the auditor signed the audit report, which is a mandatory audit requirement. This ensures proper sequencing of audit procedures.

**4. Proximity to Audit Report Date**: Per SA 580, written representations must be dated as of the same date as, or as close as practicable to (but not after), the date of the auditor's report. This ensures representations are current and directly support the audit opinion being issued.

**5. Assessment of Subsequent Events**: The date enables the auditor to identify any gap between the representation date and the report date, allowing the auditor to inquire about and asses…

Question 30

During the audit of a company, CA Kartik has noticed that company's turnover has fallen drastically as compared to last three years due to loss of its major markets and key customers. The company is in need of funds for new product development, but bankers are not willing to lend financial support. Which additional audit procedures need to be performed by CA Kartik in accordance with SA 570 when such events or conditions are identified?

Accepted Answer

**SA 570 (Revised) — Going Concern** issued by the ICAI requires the auditor, upon identifying events or conditions that may cast significant doubt on an entity's ability to continue as a going concern (such as drastic fall in turnover, loss of key customers, and inability to obtain financing), to perform **additional audit procedures** to obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists.

**Additional Audit Procedures to be performed by CA Kartik:**

**1. Analyze and Discuss Cash Flow, Profit, and Other Relevant Forecasts with Management:** CA Kartik should obtain management's projected cash flow statements and forecasts, evaluate the reliability of the underlying data, and determine whether the assumptions used are reasonable given current business conditions such as the loss of major markets.

**2. Review the Latest Available Interim Financial Statements:** CA Kartik should examine interim accounts to understand recent trends in revenues, expenses, and liquidity that may indicate whether the going concern doubt is worsening or stabilizing.

**3. Review Terms of Debentures and Loan Agreements:** CA Kartik must check whether any covenants in existing loan agreements have been breached (e.g., debt-service coverage ratios, financial covenants), which could accelerate repayment obligations and further strain liquidity.

**4. Read Minutes of Meetings of Shareholders, Board, and Relevant Committees:** CA Kartik should review the minu…

CA Inter Audit & Ethics

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Worked Solution

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