Question 1

Considering dilemma of J described in case scenario, which of the following statements is most appropriate?

Accepted Answer

**Answer: (D)**

As per **SA 300 (Planning an Audit of Financial Statements)**, the auditor is required to document: (i) the overall audit strategy, (ii) the audit plan, and (iii) any **significant changes made during the course of the audit** to the overall audit strategy or the audit plan, along with the **reasons for such changes**. Since new information has come to light requiring changes to the audit plan and possible revision of the strategy, J must document not just the original strategy and plan but also the changes and reasons therefor. Option (D) most completely and accurately captures this documentation requirement.

Question 2

Guide K regarding most appropriate statement concerning obtaining of "sufficient appropriate" evidence as described in case scenario.

Accepted Answer

**Answer: (B)**

As per the **Framework for Assurance Engagements** issued by ICAI, the concept of obtaining **sufficient appropriate evidence** applies broadly to all assurance engagements — not just statutory audits or audit engagements alone. Assurance engagements include **(i) audit engagements**, **(ii) review engagements**, and **(iii) engagements to examine prospective financial information (such as examination of forecasts and projections)**. In each of these, the practitioner is required to obtain sufficient appropriate evidence to provide a basis for the conclusion expressed. Option (A) is incorrect because the obligation to obtain sufficient appropriate evidence is not contingent on a legal requirement for audit — even a voluntary audit (as in Buddy Enterprises' case, mandated by the partnership deed) requires sufficient appropriate evidence. Options (C) and (D) are too narrow, as they exclude either prospective financial information engagements or review engagements. Since CA Anuj's firm handles all three types — audits, review engagements, and engagements to report on prospective financial information — Option **(B)** is the most appropriate and complete statement.

Question 3

Advise K regarding most appropriate statement in respect of documenting materiality.

Accepted Answer

**Answer: (C)**

As per **SA 320 – Materiality in Planning and Performing an Audit**, the auditor is required to document both **overall materiality** (materiality for the financial statements as a whole) and **performance materiality**.

**Performance materiality** is defined under SA 320 as the amount(s) set by the auditor at **less than** materiality for the financial statements as a whole. It is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

In the given case, overall materiality has been determined at ₹ 75,000 (5% of Profit before tax of ₹ 15 lacs). Performance materiality, being set at a level **lower than** ₹ 75,000, must also be documented as part of audit documentation.

Option (B) is incorrect because performance materiality is never set at **more than** overall materiality — that would defeat its purpose. Option (D) is incorrect because performance materiality is not set **at par** with overall materiality. Option (A) is incomplete as it ignores the documentation requirement for performance materiality.

Therefore, **K should document both: (1) materiality of ₹ 75,000 for the financial statements as a whole, and (2) performance materiality, which is set at less than ₹ 75,000**, making Option **(C)** the most appropriate statement.

Question 4

Which of the following combinations best describes three party relationship in context of audit of partnership firm?

Accepted Answer

**Answer: (D)**

In an assurance engagement, the **three-party relationship** consists of: (1) the **practitioner** (here, Anuj & Associates), (2) the **responsible party** (management/partners of Buddy Enterprises who prepare and are responsible for the subject matter), and (3) the **intended users** (those for whom the assurance report is intended, which in the case of a partnership firm audit could include partners, lenders, or other stakeholders — not limited to any single party like bankers or income tax authorities). This three-party structure is the defining characteristic of an assurance engagement as per the **Framework for Assurance Engagements** issued by ICAI. Options (A) and (B) incorrectly substitute income tax authorities as the third party, while Option (C) narrows the intended users only to bankers. Option (D) correctly uses the broad and accurate term **"intended users"**, which encompasses all parties relying on the assurance report.

Question 5

Which of the following statements is true regarding drawing power on basis of facts given in case scenario?

Accepted Answer

**Answer: (D)**

**Drawing Power (DP)** is calculated by applying the stipulated margin to the value of stocks declared by the firm to the banker. The DP represents the maximum amount the firm can draw against the security of stocks pledged.

**Calculation:** Stock value declared = ₹10 lacs; Margin stipulated = 20%. Therefore, DP = ₹10 lacs × (100% − 20%) = ₹10 lacs × 80% = **₹8 lacs**.

The firm can withdraw funds only up to the **lower of** the sanctioned Cash Credit (CC) limit or the Drawing Power. Here, CC limit = ₹10 lacs and DP = ₹8 lacs. Since DP (₹8 lacs) is lower than the CC limit (₹10 lacs), the firm can withdraw funds only up to **₹8 lacs**.

Hence, DP is ₹8 lacs and the firm can withdraw funds up to ₹8 lacs.

Question 6

The auditor of PAC Pvt Ltd., a pickle manufacturing company, notices that the company is expanding its operations into North India States in Financial Year 2024-25, but the related internal control system remains the same to handle the increased volume of transactions and consequently auditor concludes that material misstatements would not be prevented, or detected and corrected by the entity's internal control. Type of risk involved in this situation is:

Accepted Answer

**Answer: (B)**

The situation describes a scenario where the entity's internal control system is inadequate to handle the increased volume of transactions resulting from operational expansion into North India States, and consequently material misstatements would not be prevented or detected and corrected. This precisely defines **Control Risk** as per SA 315 (Revised 2013). Control Risk is the risk that a misstatement in an assertion could occur and not be prevented, or detected and corrected, on a timely basis by the entity's internal control system. In this case, the static internal control framework has not been strengthened despite increased operational complexity, creating a high control risk. Detection Risk relates to audit procedures, not entity controls. Inherent Risk pertains to the susceptibility of transactions to misstatement before considering controls. Audit Risk is the overall risk combining all three components.

Question 7

The auditor of XYZ Ltd. performed audit procedures to obtain sufficient appropriate audit evidence covering each and every area impacting the financial statements of the company by 20th July 2025. Before signing the auditor's report on 16th September 2025, the auditor became aware of a fire accident at the company's Yarn Factory on 10th August 2025, destroying a large part of inventory. Auditor's responsibilities in such a situation are:
(i) Perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of financial statements and the date of auditor's report that require adjustment or disclosure in the financial statements have been identified.
(ii) If such subsequent events that require adjustment or disclosure in the financia…

Accepted Answer

**Answer: (D)**

All three statements correctly describe the auditor's responsibilities for subsequent events occurring between the financial statement date and the auditor's report date.

Under **SA 560 (Standards on Auditing 560)**, the auditor has specific responsibilities regarding subsequent events:

**Statement (i) is correct**: The auditor must design and perform audit procedures to obtain sufficient appropriate evidence that all events occurring between the financial statement date (typically 31st March 2025) and the auditor's report date (16th September 2025) requiring adjustment or disclosure have been identified. In this case, the fire accident on 10th August 2025 destroying inventory falls within this period and requires identification through audit procedures.

**Statement (ii) is correct**: Once subsequent events are identified, the auditor must determine whether each event is appropriately reflected (either adjusted or disclosed) in the financial statements. The auditor cannot simply identify the event; they must verify that management has made the appropriate accounting treatment or disclosure.

**Statement (iii) is correct**: Under **SA 580 (Standards on Auditing 580)** regarding Written Representations, the auditor must obtain written representations from management. Management is required to represent that all subsequent events requiring adjustment or disclosure have been appropriately dealt with in the financial statements. This written representation is e…

Question 8

While conducting audit of Sandhya Ltd., having turnover of ₹ 200 crores and borrowings from Banks ₹ 50 crores. Audit team is determining that the accounting policies and methods of recording debt are appropriate and applied consistently and also verifying loan balances with reference to sanction letter/loan agreement. By doing above, audit team is trying to satisfy about:

Accepted Answer

**Answer: (C) Valuation.**

The audit team is performing two key procedures: (1) Determining that accounting policies and methods of recording debt are appropriate and applied consistently, and (2) Verifying loan balances with reference to sanction letters/loan agreements. Both procedures directly relate to the **Valuation (or Measurement)** assertion.

The Valuation assertion ensures that borrowings are recorded at the correct amount in the financial statements in accordance with applicable accounting standards. By checking that the methods of recording are appropriate, the auditor confirms the debt is being measured using the correct accounting policy. By verifying loan balances against sanction letters and loan agreements, the auditor ensures the principal amount, interest, and all other components of the borrowing are stated accurately and match the authorized terms. The procedures test whether the ₹50 crores of borrowings are valued correctly—neither overstated nor understated—and that any accrued interest or adjustments are properly computed and recorded. This is distinct from testing **Existence** (whether the loan actually exists), **Completeness** (whether all loans are recorded), or **Disclosure** (whether proper notes are provided).

Question 9

Micky & Associates, Chartered Accountants, were appointed as the auditors of STI Ltd., a Textile manufacturing company, for the financial year 2024-25. Management of the company discussed with the newly appointed auditors that the company has been suffering losses for the last few years and also the Directors are suspecting that accounts are not properly maintained and might contain errors and frauds. So, in the given situation, management of the company requested the auditors to give complete assurance/guarantee about the financial statements of the company. Can the auditors give complete assurance/guarantee in the above situation? Discuss with reference to objectives of Audit.

Accepted Answer

No, the auditors of Micky & Associates cannot provide complete assurance/guarantee about the financial statements of STI Ltd. Under **SA 200 (Overall Objectives of the Auditor)**, the auditor's objective is to obtain **reasonable assurance** about whether financial statements are free from material misstatement. This is a fundamental principle in audit practice—reasonable assurance is a high level of assurance but is NOT absolute or complete assurance.

The concept of reasonable assurance is established in SA 200 through the performance of appropriate audit procedures and the accumulation of sufficient appropriate audit evidence. However, absolute assurance is unattainable because audits are subject to **inherent limitations**. The auditor cannot examine all transactions and records because it is economically impractical to verify every transaction; instead, sampling techniques are used. Some evidence may be more persuasive than conclusive, and human judgment errors can occur despite professional care.

Auditors also **rely on management's internal control systems**. If controls are weak or bypassed, the auditor may not detect all misstatements. Additionally, **SA 240 (The Auditor's Responsibility Relating to Fraud in an Audit of Financial Statements)** establishes that frauds can be concealed through collusion, forging documents, or management override of controls. The auditor is NOT responsible for detecting all frauds—this responsibility primarily rests with management. Au…

Question 10

MICA Associates., Chartered Accountants, are appointed as statutory auditors of B Ltd. for the first time in F.Y. 2024-25. Before commencing the audit, the engagement partner considers the integrity of Directors, evaluates compliance with ethical requirements including independence, sends an engagement letter to avoid misunderstanding. Explain the above stage of the audit planning process as considered by the engagement partner.

Accepted Answer

The stage described is **Preliminary Engagement Activities** or **Acceptance of Engagement**, which is the initial phase of the audit planning process as per SA 210 and SA 300. This stage ensures the auditor is competent, ethical, and independent before commencing the audit.

**1. Assessment of Integrity of Directors:**
The engagement partner must assess whether the Directors possess integrity and trustworthiness. This involves evaluating whether Directors are likely to be straightforward and honest in business dealings. The assessment includes: reviewing Directors' background, reputation, regulatory standing, and prior conduct. Inquiries may be made with predecessor auditors (if any) and regulatory bodies such as ROC. Any indicators of lack of integrity, such as involvement in fraud, legal violations, or unethical practices, may lead to rejection of the engagement. This assessment is critical as Directors are responsible for financial reporting, and their integrity directly impacts the audit risk and the auditor's ability to rely on management representations.

**2. Compliance with Ethical Requirements and Independence:**
The engagement partner must ensure full compliance with ICAI Code of Ethics and independence requirements, which are non-negotiable for the audit profession. Independence must exist both in **fact** (actual independence) and in **appearance** (perception of independence). The auditor must check for any threats including: financial interests or holdings in t…

Question 11

SPOM & Co. is a firm of Chartered Accountants established in 2010 with major focus on Audit Practice. In F.Y. 2024-25, firm has four partners and 15 articled assistants handling various Internal audit and Statutory Audit assignments. Partners and articled assistants meet monthly to discuss various aspects of practical as well as academic issues. While discussing about various aspects of Audit Risk, Risk of material misstatement etc., Partner S asks one of the articled assistants to explain the concept of misstatement with the help of at least five examples.

Accepted Answer

**Definition of Misstatement:** A misstatement is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required to be presented in accordance with the applicable financial reporting framework (Ind AS or AS). Misstatements may arise from errors (unintentional) or fraud (intentional), and may be classified as factual, judgmental, or projected.

**Types of Misstatements:**

**1. Factual Misstatements** are clearly and unambiguously incorrect—amounts that do not comply with the applicable accounting framework. These are objective errors with no alternative interpretation.

**2. Judgmental Misstatements** arise from differences of opinion regarding accounting estimates, principles, or policies applied by management where judgment is involved. Even if management's estimate is within reasonable range, the auditor may conclude it is misstated based on his assessment.

**3. Projected Misstatements** are the extrapolation of misstatements identified in audit samples to the entire population, even though only a portion has been tested.

**Examples of Misstatements:**

**Example 1 – Overstatement of Inventory:** An entity physically counts inventory and records ₹50 lakhs in the ledger. However, audit verification reveals the actual quantity equals ₹45 lakhs. The overstatement of ₹5 lakhs is a factual misstatement because the recorded amount does not correspon…

Question 12

With respect to SA 505, "External Confirmations", name the appropriate term that may be used in relation to the below statements:

Accepted Answer

SA 505 'External Confirmations' provides specific terminology for different aspects of the confirmation process:

(a) **External Confirmation** — This is the audit evidence received directly from the confirming party (third party) in written form, whether paper or electronic medium.

(b) **Positive Confirmation** (or Positive Confirmation Request) — This requires the confirming party to respond directly to the auditor in all cases, either confirming agreement or indicating disagreement with the information in the request.

(c) **Negative Confirmation** (or Negative Confirmation Request) — This requires the confirming party to respond directly to the auditor only if they disagree with the information provided; silence is treated as agreement.

(d) **Non-response** — This refers to the situation where the confirming party fails to respond at all, provides an incomplete response, or where the confirmation request is returned undelivered by postal or other means.

(e) **Exception** — This is the term used when a response from the confirming party indicates a difference or discrepancy between the information in the entity's records (that was requested to be confirmed) and the information actually provided by the confirming party.

Question 13

SIME & Co., Chartered Accountants, have been appointed as statutory auditors of Delight & Delight, a Partnership firm, for the first time for F.Y. 2024-25. The previous year's financial statements were not subject to audit. During the audit, the new auditors noticed differences in some opening balances brought forward from previous year. With respect to relevant SA, explain the objective of Auditor with respect to opening balances.

Accepted Answer

**SA 510 - Initial Audit Engagements and Opening Balances** addresses the auditor's responsibilities when conducting an initial audit, particularly regarding the opening balances at the commencement of the current period.

**Objective of the Auditor Regarding Opening Balances:**

Under SA 510, the primary objective of the auditor is to **obtain sufficient appropriate audit evidence that opening balances are not misstated and do not contain errors that would materially affect the current period's financial statements**. This is critical because opening balances form the foundation for the current year's financial statements.

The key objectives include:

**1. Ensuring Accuracy and Completeness:** The auditor must verify that opening balances are correctly stated in accordance with the applicable financial reporting framework. This includes confirming that all assets, liabilities, and equity balances have been properly brought forward.

**2. Consistency of Accounting Policies:** The auditor should ensure that opening balances reflect the consistent application of accounting policies between the current period and prior periods. Any changes in accounting policies must be properly disclosed and adjusted.

**3. Verification Against Prior Year Records:** The auditor must trace opening balances to the immediately preceding period's closing balances to ensure proper continuity and absence of gaps or duplications.

**Specific Consideration - Prior Year Not Audited:**

In this case, si…

Question 14

In the Balance Sheet of Watches Ltd., additions worth ₹ 20 Crores are appearing under Property, Plant & Equipment. Auditor of the company, in addition to the procedures undertaken for verifying completeness of additions to PPE during the period under audit, while performing testing of additions also want to verify that all PPE purchase invoices are in the name of the company. Name the relevant assertion for verification of ownership and procedure to verify the same.

Accepted Answer

The relevant audit assertion for verification of ownership of Property, Plant & Equipment is the **Rights and Obligations Assertion**. This assertion confirms that the entity has the legal rights to and obligations with respect to the PPE shown in the Balance Sheet.

**Procedures to verify Rights and Obligations Assertion:**

1. **Inspection of Purchase Invoices and Contracts**: Examine all purchase invoices and purchase agreements for PPE additions to verify they are in the name of the company. This provides direct evidence of the company's rights to the assets.

2. **Verification of Title Documents**: For land and buildings, review title deeds, property registration documents, and legal ownership papers to confirm the company's legal ownership.

3. **Review of Board Minutes and Approvals**: Examine board resolutions and approval minutes to verify that major PPE purchases were authorized by the Board, indicating the company's intent and right to acquire such assets.

4. **Inspection of Physical Assets**: Physically inspect PPE to verify their existence and condition, cross-checking with supporting documentation. Check if any ownership plates or markings indicate company ownership.

5. **Review of Insurance Policies**: Verify that PPE is insured in the name of the company. Insurance policies typically list the insured as the owner, providing evidence of ownership.

6. **Examination of Loan Documents**: Review loan agreements and mortgage deeds to identify any PPE that is mort…

Question 15

FSY & Co., Chartered Accountants, completed the statutory audit of HIMMAT Ltd. for the year ended 31st March 2025. The audit partner instructed the audit team to finalize and assemble the audit documentation immediately after signing the auditor's report on 15th September 2025. However, audit team took this instruction lightly and forgot to assemble the audit documentation. After six months, audit team started assembling the file and completed its documentation. When audit partner became aware of this, he called a meeting of staff and discussed policies and procedures for timely completion of audit files, changes to audit documentation and period of retention of engagement documentation. Explain various points discussed by audit partner with reference to relevant standard on auditing.

Accepted Answer

**Timely Completion of Audit Files** — SA 230 (Audit Documentation) requires that the engagement partner ensure the audit file is completed on a timely basis. The standard mandates that the file assembly must be completed within 60 days from the date of the auditor's report. In this case, the auditor's report was signed on 15th September 2025, so the audit documentation should have been finalized by 14th November 2025. The audit team's delay of six months in beginning assembly directly violates this requirement. The audit partner must emphasize that timely completion ensures documentation remains accurate while work is fresh, strengthens quality control, and demonstrates adherence to professional standards. Delayed assembly risks loss of memory regarding decisions, increased costs, and potential regulatory non-compliance.

**What Audit Files Shall Include** — The audit partner should clarify that the engagement file must contain sufficient and appropriate audit evidence that supports the auditor's conclusions and the audit opinion. SA 230 requires the file to include: (a) engagement letters or terms of engagement; (b) correspondence with the entity and third parties; (c) risk assessment documentation and planned audit procedures; (d) audit working papers supporting the examination of transactions, balances, and disclosures; (e) evidence of direction, supervision, and review of the engagement; (f) representation letters; (g) documentation of conclusion on significant matters.
…

Question 16

GEM Ltd has appointed GSP & Co., Chartered Accountants as its Statutory Auditors. While conducting its audit, the audit partner requested the management to provide a written representation that it has fulfilled its responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework. The Manager (Finance) is of the view that since all records and evidence have already been given, a separate written representation is not required. Explain.

Accepted Answer

Written representations are **mandatory audit evidence** under **SA 580 – Written Representations** and cannot be dispensed with despite management providing all records and supporting documents. Here's why:

**Why Written Representations Are Essential:**

1. **Distinct Form of Audit Evidence**: Written representations constitute independent audit evidence per SA 580. They are not a substitute for, but complementary to, other audit procedures. Records alone cannot satisfy the auditor's evidence requirements regarding management's assertions.

2. **Confirmation of Management's Responsibility**: Written representations explicitly confirm that management acknowledges its responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework (Ind AS/AS). This formal acknowledgment is distinct from merely providing source documents.

3. **Assertions Incapable of Independent Verification**: Many critical assertions cannot be evidenced solely through inspection of records:
   - Going concern assumption and future plans
   - Completeness of recorded transactions, liabilities, and contingencies
   - Appropriateness of accounting policies, estimates, and judgments
   - Adequacy of provisions and disclosure of contingent liabilities
   - Subsequent events between year-end and audit report date

4. **Evidence of Completeness**: Written representations provide evidence that management has disclosed all relevant …

Question 17

SA 701 deals with the auditor's responsibility to communicate key audit matters in the auditor's report. It is intended to address both the auditor's judgement as to what to communicate in the auditor's report and the form and content of such communication. In the above context, explain the purpose of communicating key audit matters.

Accepted Answer

**SA 701** (Key Audit Matters in the Independent Auditor's Report) establishes the auditor's responsibility to communicate key audit matters (KAMs) in the auditor's report. The purposes of communicating KAMs are multi-fold:

**Enhanced Transparency and Communication**: The primary purpose is to enhance the informational value and transparency of the auditor's report by communicating to users the matters that required the most significant audit attention during the audit. This moves beyond the standard audit opinion to provide a narrative of key judgments made and significant areas of focus.

**Auditor's Significant Judgments**: KAMs communicate those matters that, in the auditor's professional judgment, were most significant during the audit, particularly those involving difficult, subjective, or complex judgments. This demonstrates the nature and extent of auditor effort and expertise applied to significant areas.

**Significant Risk Areas**: The communication specifically addresses matters involving significant risks of material misstatement (whether or not actually detected), areas of high complexity, high degree of uncertainty, or that were subject to significant management judgment. This helps users understand where the audit risk was concentrated.

**Accountability and Stakeholder Engagement**: KAMs enhance the accountability of auditors to those charged with governance and other users of financial statements. They facilitate more effective two-way dialogue between audi…

Question 18

You are appointed as an auditor of Great Eastern Hotel, a Five Star hotel, for Financial Year 2024-25. As an auditor what are the special points that need to be considered in verifying the Inventories in the nature of food and beverages?

Accepted Answer

**Special Considerations in Auditing Food and Beverage Inventories - Great Eastern Hotel**

**Nature and Characteristics of F&B Inventories**

Food and beverage inventories in a five-star hotel have unique characteristics requiring specialized audit procedures. These include: (i) highly perishable nature with limited shelf life; (ii) diverse range of items (food grains, vegetables, meat, beverages, condiments, spices); (iii) continuous receipt and consumption patterns; (iv) high volume of daily transactions; and (v) significant scope for spoilage and wastage. The auditor must recognize these characteristics to design appropriate audit procedures.

**Valuation Method and Obsolescence**

The auditor should verify that inventories are valued using the **FIFO (First-In-First-Out) method**, which is most appropriate for perishable goods to ensure older stock is consumed first. Under **AS 2 (Valuation of Inventories)** or **Ind AS 2**, inventories must be stated at the lower of cost and net realizable value. Special attention must be paid to: (i) identifying slow-moving and non-moving items; (ii) assessing reasonableness of provisions for obsolescence and spoilage; (iii) examining whether provision rates are based on historical consumption patterns; and (iv) testing the adequacy of provisions, especially for seasonal items.

**Physical Verification Procedures**

The auditor should verify that physical verification is conducted at strategic intervals, not merely at year-end. Key pro…

Question 19

While verifying provisions of advances of a branch of HFC Bank as part of statutory branch audit, CA Mini notices that credit facilities consisting of term loan to JT Mills have been classified under doubtful asset (D2) category. The outstanding balance in above term loan account as on 31.3.2025 is ₹ 150 lakhs. Value of security held in account is ₹ 100 lakhs. The branch has made provision of ₹ 75 lakhs. Is provision made by branch proper? Discuss.

Accepted Answer

**Provisioning Norms for Doubtful Assets — D2 Category**

As per **RBI Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP)** applicable to banks and HFCs (Housing Finance Companies brought under RBI regulation w.e.f. 2021), the provisioning requirements for **Doubtful Assets** differ based on the sub-category and whether the exposure is secured or unsecured.

**Classification of Doubtful Assets:**
Doubtful assets are sub-classified as:
- **D1** — Doubtful for up to 1 year → Secured: 25%, Unsecured: 100%
- **D2** — Doubtful for more than 1 year and up to 3 years → Secured: 40%, Unsecured: 100%
- **D3** — Doubtful for more than 3 years → Secured: 100%, Unsecured: 100%

Since the term loan to JT Mills is classified under **D2 category**, the applicable rates are **40% on secured portion** and **100% on unsecured portion**.

**Computation of Required Provision:**

Outstanding balance: ₹150 lakhs
Value of security held: ₹100 lakhs

Secured portion = ₹100 lakhs → Provision @ 40% = **₹40 lakhs**
Unsecured portion = ₹150 − ₹100 = ₹50 lakhs → Provision @ 100% = **₹50 lakhs**

**Total Required Provision = ₹40 + ₹50 = ₹90 lakhs**

**Provision made by the branch = ₹75 lakhs**

**Conclusion:** The provision of ₹75 lakhs made by the branch is **NOT proper and adequate**. There is a **shortfall of ₹15 lakhs** (₹90 lakhs required − ₹75 lakhs provided). CA Mini should report this short provision in the Long Form Audit Report (LFAR) and also consider its impac…

Question 20

CA Jatin is auditor of XYZ Pharma, his brother-in-law's Partnership Firm. His family relationship creates a conflict of interest that could unduly influence his professional judgment, making it difficult for him to provide an unbiased opinion on the firm's financial statements.

In another assignment of Tax Audit of a company, CA Jatin is also required to prepare the company's tax return. He fails to check the latest provision of the Income-tax Act which allows for a major new deduction resulting in the client overpaying income tax.

CA Jatin is also preparing GST returns of one of his clients. The client instructs him to intentionally understate the sales figures to reduce the tax liability.

Identify and explain the fundamental principles of professional ethics involved in above situatio…

Accepted Answer

The scenarios presented illustrate violations of three fundamental principles of professional ethics as per the Code of Ethics issued by the Institute of Chartered Accountants of India.

**OBJECTIVITY (Scenario 1: Auditor of Brother-in-law's Firm)**

Objectivity requires that a Chartered Accountant shall not allow prejudice, bias, or undue influence to override professional judgment. In the first scenario, CA Jatin's family relationship with the partner creates a **familiarity threat** and **relationship threat** to his independence and objectivity. The fundamental principle of objectivity is compromised because:

• The personal relationship with a family member could unduly influence his professional judgment in evaluating the firm's financial statements.
• He may be inclined to overlook audit findings or adopt overly favorable accounting treatments to benefit the relative.
• This violates his duty to provide an independent and unbiased professional opinion.

Under SA 220 (Quality Control for an Audit of Financial Statements) and SA 560, auditors must assess threats to independence. When such threats exist, safeguards must be implemented or the engagement declined. The severity of family relationships makes continuation inappropriate.

**PROFESSIONAL COMPETENCE AND DUE CARE (Scenario 2: Tax Audit and Return Preparation)**

Professional Competence and Due Care require that a CA shall maintain the knowledge and skill necessary to provide services competently and shall exercise…

CA Inter Audit & Ethics

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