Question 1

In the audit of ABC Limited, which combination of circumstances primarily justified the auditor's decision to obtain additional audit evidence for inventory valuation?

Accepted Answer

**Answer: (B)**

The auditor's decision to obtain additional audit evidence was primarily justified by the **combination of prior period discrepancies** (which signalled inherent risk), **high price volatility** (which increased valuation risk), and **contradictory inquiry responses** — specifically, the stores manager's admission that obsolete items were still carried at cost due to profitability pressure, directly contradicting management's representation. Per **SA 500 (Audit Evidence)** and **SA 315 (Identifying and Assessing the Risks of Material Misstatement)**, when inquiry responses are inconsistent and prior period issues exist, the auditor must obtain more persuasive evidence. Option (A) is a contributing factor but only one element. Option (C) references materiality and ageing reports, which are procedural tools, not the primary risk drivers. Option (D) relates to the physical count scope, not valuation risk.

Question 2

The stores manager's statement that obsolete items were carried at cost due to pressure to meet profitability targets most appropriately implies that the auditor should:

Accepted Answer

**Answer: (C)**

The stores manager's statement directly contradicts management's representation that adequate provisions had been made for obsolete inventory. The indication that obsolete items were carried at cost due to pressure to meet profitability targets is a classic indicator of **management bias** — where financial reporting judgements are influenced by an incentive to achieve a desired outcome rather than reflect economic reality. Under **SA 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements)** and **SA 315 (Identifying and Assessing the Risks of Material Misstatement)**, such contradictory evidence obtained during inquiry requires the auditor to exercise **professional scepticism** and reassess the audit approach. The auditor must treat this as a fraud risk indicator and modify audit procedures to obtain sufficient appropriate evidence, including extended substantive testing on inventory valuation. Options (A) and (B) represent failures of professional scepticism. Option (D) is incorrect because inquiry alone, per **SA 500 (Audit Evidence)**, is not sufficient appropriate audit evidence — it must be corroborated with other procedures.

Question 3

In the audit of ABC Limited, after obtaining contradictory responses during inquiry and before designing substantive procedures, the auditor decided to test controls specifically over approval of inventory write-downs and review of ageing reports. This decision was primarily to determine whether:

Accepted Answer

**Answer: (A)**

The auditor tested controls over approval of inventory write-downs and review of ageing reports specifically to determine whether these controls **existed and operated effectively to prevent management from deferring write-downs of obsolete inventory to meet profitability targets**. The stores manager's admission that certain obsolete items were still carried at cost due to profitability pressure directly pointed to a control failure in the write-down approval process. Under **SA 330 (The Auditor's Responses to Assessed Risks)**, when a high risk of material misstatement is identified, the auditor must obtain sufficient appropriate audit evidence about whether controls relevant to that risk are operating effectively. The purpose here was not to verify physical quantities (Option B), nor to decide whether substantive testing could be restricted to analytical procedures alone (Option C) — indeed, the controls were ultimately found to be ineffective, requiring expanded substantive procedures. Option D is incorrect because management representations alone are never sufficient audit evidence for high-risk areas per **SA 580 (Written Representations)**.

Question 4

After concluding that controls over identification and valuation of obsolete inventory were not operating effectively throughout the period, the auditor performed procedures such as examining subsequent sales prices, physically inspecting slow-moving items, and performing substantive analytical procedures. These procedures were primarily designed to:

Accepted Answer

**Answer: (B)**

When controls are found to be ineffective, the auditor cannot rely on them to reduce substantive testing. Instead, substantive procedures are designed to obtain **direct audit evidence** about whether the financial statement assertions are materially misstated. In this case, examining subsequent sales prices, physically inspecting slow-moving items, and performing substantive analytical procedures directly address whether inventory was **overstated** — i.e., whether write-downs were delayed or inadequate, which relates to the **valuation assertion** under SA 330 (The Auditor's Responses to Assessed Risks). Option (A) relates to tests of controls (approval process), not substantive procedures. Option (C) is part of risk assessment, not the response phase. Option (D) is incorrect as the auditor's role is to obtain independent evidence, not corroborate management's self-serving representations.

Question 5

The auditor identified that certain slow-moving and obsolete inventory items continued to be carried at cost due to pressure to meet profitability targets. This situation most directly affects which management assertion, thereby requiring focused audit procedures in response to the identified risk?

Accepted Answer

**Answer: (D)**

The assertion most directly affected is **Valuation**. As per **AS 2 (Valuation of Inventories)**, inventory must be measured at the **lower of cost and net realisable value (NRV)**. When slow-moving or obsolete items are carried at cost despite a decline in NRV, inventory is **overstated** in the financial statements. The stores manager's admission that obsolete items were retained at cost due to profitability pressure is a direct indicator that management's valuation assertion — that inventory is recorded at appropriate amounts — is at risk. The other options are incorrect: the items physically exist (ruling out Existence), they are recorded in the books (ruling out Completeness), and the primary issue is measurement, not classification or disclosure (ruling out Presentation and Disclosure).

Question 6

During the audit of QRS Ltd. for the year ended 31 March 2025, the auditor observed that management had changed the method of depreciation from Written Down Value Method to Straight Line Method. The change was applied in the current year and disclosed in the notes to accounts. The auditor also reviewed whether the financial statements appropriately summarised the transactions and events recorded and evaluated the judgments made by management in selecting and applying accounting policies consistently. In the above case, which of the following represents the auditor's responsibility while evaluating the financial statements?

Accepted Answer

**Answer: (D)**

The auditor's responsibility in evaluating financial statements includes assessing the appropriateness of accounting policies selected by management, evaluating their consistent application, and ensuring proper disclosure of relevant information. Option (D) correctly captures this responsibility.

Option (A) is incorrect because **selecting accounting policies is management's responsibility**, not the auditor's. The auditor evaluates the policies selected by management but does not select them.

Option (B) is incorrect as it refers to management's responsibility to prepare and present financial statements in accordance with statutory requirements. The auditor audits what management has prepared but does not prepare the statements themselves.

Option (C) is incorrect because the auditor lacks the authority to unilaterally change accounting policies. While the auditor can form a view on whether policies appropriately reflect a true and fair view and report deficiencies to those charged with governance, the power to change policies rests with management.

In the given case, the depreciation method change from WDV to SLM was a management decision, properly disclosed, and applied in the current year. The auditor's role was to evaluate whether the change was appropriate, consistently applied, and adequately disclosed—all encompassed in option (D).

Question 7

P & Co., Chartered Accountants, were appointed as statutory auditors of LMN Ltd. for the year ended 31 March 2025. Soon after completing the audit for the previous year, the engagement team began discussions for the current year's audit. Before identifying and assessing the risks of material misstatement, the auditor planned the timing of certain activities such as applying analytical procedures, obtaining an understanding of the applicable legal and regulatory framework, determining materiality and considering the need for involvement of experts. Which of the following statements best explains the nature of audit planning as per the Standards on Auditing in the above case?

Accepted Answer

**Answer: (B)**

SA 300 (Planning an Audit of Financial Statements) defines audit planning as a **continual and iterative process** that extends throughout the audit engagement, not merely a preliminary phase. The scenario demonstrates this correctly by showing the auditor performing planning activities—including obtaining an understanding of the legal and regulatory framework, determining materiality, considering analytical procedures, and assessing the need for experts' involvement—before identifying and assessing risks of material misstatement.

These preliminary planning considerations are integral components of the audit planning process and typically occur at the outset of the engagement. Option (B) accurately reflects the standards' position that audit planning encompasses a broader range of activities than administrative tasks alone.

**Why other options are incorrect:**

(A) is wrong because the scenario explicitly shows planning activities occurring BEFORE risk identification, not after.

(C) is too restrictive; planning involves far more than program preparation and staff allocation, as the scenario illustrates.

(D) is incorrect because audit planning is required for all engagements (recurring or initial), as demonstrated by the scenario involving a continuing client relationship.

Question 8

While auditing a charitable trust for the year ended 31 March 2025, the auditor obtained a list of books and records maintained by the trust and verified them with the mandatory records prescribed. Based on his evaluation of internal controls, he applied test checks, complied with the applicable Accounting Standards and Standards on Auditing, considered materiality while performing audit procedures and maintained detailed working papers documenting the audit evidence relied upon for forming his opinion. Which of the following actions of the auditor in the above case is most appropriate as per generally accepted auditing practices?

Accepted Answer

**Answer: (A)**

Option (A) is the most appropriate action as per generally accepted auditing practices for charitable trust audits. The auditor's approach correctly demonstrates compliance with Standards on Auditing (SA) and core audit principles.

**Why Option (A) is correct:**

The use of **professional judgment** in determining audit procedures is fundamental to SA 200 (Overall Objectives of the Independent Auditor). Applying test checks based on the **evaluation of internal controls** aligns with SA 400 and the risk-based audit approach. Internal controls are relevant in all audits, including trust audits, and form the basis for determining the nature, timing, and extent of audit procedures.

**Consideration of materiality** is mandatory under SA 200 and SA 320, and applies comprehensively throughout the audit planning, execution, and reporting stages. **Maintenance of detailed working papers** documenting all audit evidence is required by SA 230 (Audit Documentation) to support the auditor's opinion.

**Why other options are incorrect:**

Option (B) is false because internal control evaluation is mandatory in trust audits—the auditor must assess control risk and design procedures accordingly per SA 400.

Option (C) is incorrect because **Standards on Auditing (SA) are mandatory, not recommendatory** for all audits including trust audits. Both Accounting Standards (AS) and SA must be complied with.

Option (D) is wrong because SA 230 requires comprehensive audit document…

Question 9

You are appointed as statutory auditor of Zebra Industries Ltd. for FY 2024–25. During the course of audit, you observe that the company's management frequently delays in providing certain documents and explanations requested by you. A portion of the accounting records related to "special procurement" is supported only by basic acknowledgements without proper vendor details. You also notice that some transactions appear to be with entities that may be related to the company, but management denies the existence of any such relationships. Further, during verification, you find that some documents produced as evidence appear unusually uniform and lack standard commercial markings, raising concerns about their authenticity. Since your audit is conducted on a test-check basis, you are unable to…

Accepted Answer

**Inherent Limitations of Audit Restricting Absolute Assurance**

Inherent limitations are restrictions arising from the fundamental nature of the audit process itself, which prevent the auditor from obtaining absolute assurance, though reasonable assurance can be achieved. These are explained in the context of Zebra Industries Ltd.

**1. Management Override and Denial of Related Parties**

Management's denial of related party relationships while conducting unexplained "special procurement" transactions exemplifies the auditor's inherent inability to force disclosure. Auditors cannot independently verify facts that management intentionally conceals or denies. Per **SA 240**, fraudulent financial reporting often involves management override of controls, which is inherently difficult to detect without the cooperation or admission of management. The auditor's audit procedures depend largely on management cooperation, creating an unavoidable vulnerability.

**2. Limitations of Audit Evidence and Document Authenticity**

According to **SA 500**, audit evidence is persuasive but not conclusive. The unusual uniformity and lack of standard commercial markings on documents raise authenticity concerns, yet the auditor cannot definitively determine forgery without forensic expertise or management admission. External documentary evidence, while generally more reliable than internal sources, can be fabricated. The auditor's procedures provide reasonable confidence but cannot guarantee abs…

Question 10

You are the Engagement Partner for the statutory audit of Strong Engineering Ltd. for FY 2024–25. While planning the audit, you observe the following practical issues:
(i) Two newly recruited audit assistants inform you that they are unsure about the exact audit procedures expected from them for different areas of the audit.
(ii) The audit this year is a major assignment involving multiple units, and your team seems unable to visualise the full scope of procedures to be performed.
(iii) Because the audit work has not been formally planned, defined and segregated, you are unable to allocate tasks to assistants on the basis of their individual capabilities.
(iv) Last year, in the absence of a written programme, the then audit team followed a "mental plan", as a result of which certain subsid…

Accepted Answer

A written audit programme is a formal, documented plan that outlines in detail the nature, timing, and extent of audit procedures to be performed for each audit area. It serves as a critical bridge between audit strategy and execution. The advantages are evident from the practical issues faced in the Strong Engineering Ltd. audit.

**Clarity for New Team Members:** The confusion of newly recruited assistants about expected procedures is directly addressed by a written programme. A well-prepared programme clearly defines procedures, scope, timing, and deliverables expected from each assistant. This ensures all team members understand their responsibilities precisely, reducing the risk of incomplete or incorrect execution. As per **SA 300 (Planning an Audit of Financial Statements)**, the auditor must communicate responsibilities clearly to team members.

**Visualization of Full Audit Scope:** In a complex multi-unit engagement, inability to visualize the full scope is a significant planning challenge. A written audit programme provides a comprehensive overview of all audit areas, procedures, and their interrelationships across all units. This holistic view enables the team to understand the full extent of work and ensures no significant area is overlooked in the overall audit strategy.

**Rational Task Allocation:** The inability to allocate tasks based on individual capabilities is a quality issue. A written programme allows the engagement partner to map specific procedures t…

Question 11

ABC Limited is a medium-sized manufacturing company having multiple departments and large volume of transactions. The management claims that the company has a well-designed internal control system and an internal audit department in place. While planning the statutory audit, the auditor decides to evaluate the internal control system of the company before determining the nature, timing and extent of audit procedures. During the review, the auditor focuses not only on accounting controls but also on administrative controls and their impact on financial reporting. Based on the above facts, explain how evaluation of the internal control system would benefit the auditor in planning and conducting the statutory audit of ABC Limited.

Accepted Answer

**Understanding the Entity and Its Control Environment** The evaluation of ABC Limited's internal control system is fundamental to the auditor's understanding of the entity's control environment as required under SA 315. By examining both accounting controls (which directly affect financial reporting) and administrative controls (which impact the overall control consciousness and governance), the auditor gains insight into management's emphasis on control discipline and the organizational structure. This understanding enables the auditor to assess the pervasiveness and effectiveness of controls across multiple departments and their collective impact on the reliability of financial information.

**Risk Assessment and Materiality Determination** Evaluating the internal control system allows the auditor to assess the inherent and control risks for various transaction cycles and account balances. The effectiveness of internal controls directly influences control risk, which in turn affects the overall audit risk. For ABC Limited, with its large volume of transactions across multiple departments, a strong internal control system would lower the assessed level of control risk, whereas weaknesses would increase it. This risk assessment is essential for determining appropriate materiality levels and performance materiality, which guide the scope and focus of audit procedures.

**Determining Nature, Timing and Extent of Audit Procedures** As stated in SA 330, the auditor's responses t…

Question 12

XYZ Limited is engaged in infrastructure development and has significant balances relating to valuation of long-term assets and environmental provisions. Environmental provisions are amounts recognised for future obligations like site restoration, environmental clean-up, or compliance with environmental laws, which also involve technical and judgmental estimates. For this purpose, the management has engaged independent experts to determine fair values and technical estimates which have been incorporated in the financial statements. While conducting the statutory audit, the auditor considers whether and to what extent he can rely on the work performed by the management's expert for obtaining audit evidence and forming his audit opinion. State the condition and procedures to be followed by t…

Accepted Answer

**Definition**: A management's expert is a person or firm possessing expertise in a field other than accounting or auditing whose work is used by the entity to assist in preparing financial statements. In XYZ Limited's case, valuers and environmental consultants are management's experts.

**CONDITIONS FOR RELYING ON MANAGEMENT'S EXPERT**:

**1. Competence and Capability**: The expert must possess appropriate technical knowledge, qualifications, and professional experience in the specific field. For infrastructure valuation and environmental provisions, the expert should have demonstrable expertise in asset valuation methodologies and environmental compliance standards. Educational credentials and prior engagement on similar matters should be verified.

**2. Objectivity and Independence**: The expert must be independent from management pressures and free from conflicts of interest. The engagement terms should not restrict the expert's professional judgment. Payment arrangements must not incentivize favorable conclusions. The expert should report findings objectively based on evidence, not management's desired outcomes.

**3. Adequacy of Terms of Engagement**: A clear written engagement letter between the entity and expert should specify: the scope and objectives of the expert's work, the expert's responsibilities, access to entity records and information needed, applicable technical standards (Ind AS 36, Ind AS 37), and reporting responsibilities to the auditor.

**4. Relevanc…

Question 13

PQR Limited is engaged in trading and manufacturing activities and reports a substantial amount of inventories in its financial statements as at 31st March 2025. A portion of the inventories is held at the company's own warehouses, while some inventories are held on consignment and with third parties. While conducting the audit, the auditor is required to obtain sufficient and appropriate audit evidence to establish the legal ownership rights over the inventories claimed to be held by the entity and recorded in the financial statements. State the audit procedures to establish the legal ownership rights over the inventories claimed to be held by the entity.

Accepted Answer

**Audit Procedures to Establish Legal Ownership Rights Over Inventories**

**1. General Procedures for All Inventory Categories**

The auditor should obtain written representation from management confirming that all inventories recorded in the financial statements are the legal property of the entity and are not pledged, hypothecated, or subject to any lien. Review minutes of board meetings and resolutions to identify any restrictions on inventory ownership or any security created over inventory.

**2. Procedures for Inventories Held at Own Warehouses**

Examine title deeds and lease agreements to confirm the entity's ownership or right of occupation of warehouse premises. Verify that purchase invoices and delivery notes support the acquisition of inventories and trace them to inventory records. Inspect the physical storage arrangements during inventory observation to ensure proper segregation and identification. Obtain and examine warehouse receipts and bin cards to establish the custodial arrangements. Review insurance policies to identify the insured parties, which should confirm the entity's ownership interests. Verify that the inventory is recorded in the entity's name in all relevant registers and documentation.

**3. Procedures for Consignment Inventories**

Obtain and review detailed consignment agreements to understand the terms, including when legal ownership transfers and the consignee's authority regarding the goods. Send confirmations to all consignees requesting…

Question 14

TUV Ltd. is engaged in the business of manufacturing and sale of electronic appliances. During the audit of the company for the year ended 31st March 2025, the auditor observed a significant increase in revenue in the last month of the financial year as compared to previous months. Further, it was noticed that:
• Some sales invoices near year-end were cancelled subsequently.
• The sales return ratio for the current year showed wide fluctuation compared to the previous year.
• Management was under pressure to meet revenue targets to comply with loan covenants.
• Certain customers had not made payments even after an extended credit period.
The auditor is concerned about the risk of overstatement of revenue and wants to verify whether the recorded sales genuinely represent goods shipped or se…

Accepted Answer

The **Occurrence assertion** requires that sales transactions recorded in the financial statements actually occurred and represent goods shipped or services performed during the period. Given the identified risk factors—significant year-end revenue spike, cancelled invoices, pressure to meet loan covenants, and extended credit defaults—the auditor should perform the following substantive procedures:

**1. Detailed Testing of Year-End Sales Invoices**
Select a representative sample of sales transactions recorded in the last quarter, particularly the final month. For each selected invoice, obtain supporting evidence including: original sales invoice, delivery challan/bill of lading, customer purchase order, and proof of shipment. Match the invoice amount with dispatch records to confirm goods were actually dispatched before year-end. This directly tests whether recorded transactions correspond to genuine business activity.

**2. Cutoff Testing**
Review the sales journal for transactions recorded near year-end (last 5-7 days of March and first few days of April) to ensure proper cutoff. Verify that revenue recognized on 31st March relates to goods shipped on or before that date in accordance with the entity's revenue recognition policy (FOB shipping point vs. destination). Assess whether any invoices were recorded in the wrong period, particularly examining the spike in final month revenue.

**3. Verification of Cancelled Invoices**
Obtain a list of sales invoices cancelled post…

Question 15

ABC & Co., Chartered Accountants is conducting the statutory audit of a listed company having multiple locations and a large engagement team. The audit involves extensive planning, supervision, review of work performed by assistants and is also subject to quality control review by the firm as well as possible inspection by regulatory authorities. During the audit, the engagement partner emphasises the need for proper and comprehensive audit documentation. With reference to above, explain the purpose served by audit documentation for the auditor and the engagement team.

Accepted Answer

**Audit documentation** constitutes the record of audit procedures performed, evidence obtained, and conclusions reached by the auditor. In the context of a large, multi-location statutory audit engagement with an extensive team and regulatory oversight, audit documentation serves multiple critical purposes:

**Supporting the Audit Opinion and Compliance with Standards**: Audit documentation provides the principal support for the auditor's opinion on the financial statements. It demonstrates that the audit was planned, performed, and supervised in accordance with Standards on Auditing (SAs). Specifically, SA 230 requires that audit documentation contain sufficient and appropriate audit evidence to support the conclusions on which the audit opinion is based. This is essential for a listed company audit where the opinion must be credible to multiple stakeholders, including investors, regulators, and the public.

**Facilitating Supervision and Review of Team Work**: Given the large engagement team and multiple locations involved, audit documentation serves as the primary mechanism through which the engagement partner and senior team members supervise and review the work performed by junior auditors and assistants. Comprehensive documentation enables the reviewer to ascertain what work was planned, how it was executed, what evidence was gathered, and what conclusions were drawn. This hierarchical review process ensures quality and consistency across all locations and ensures that…

Question 16

During the audit of LMN Limited, the auditor identified certain significant deficiencies in the internal control system which could adversely affect the reliability of financial reporting. The auditor is required to communicate such deficiencies to those charged with governance and also to management on a timely basis. Further, the auditor is required to ensure that the written communication clearly specifies the nature and implications of such deficiencies. With reference to above, explain:

Accepted Answer

The auditor's responsibility for communicating significant deficiencies in internal control is governed by **SA 265: Communicating Deficiencies in Internal Control to Those Charged with Governance and Management**.

**Part (i): Auditor's Responsibility for Communication**

Under SA 265, the auditor must identify **significant deficiencies** (deficiencies or combinations of deficiencies in internal control that are less severe than material weaknesses but important enough to merit governance attention) that come to light during the audit. The auditor is required to communicate such deficiencies **in writing** to those charged with governance on a **timely basis**, typically before audit completion. This is a mandatory requirement.

The auditor must also communicate to **management** if management has not already identified these deficiencies. Additionally, the auditor should evaluate whether management has satisfactorily resolved any significant deficiencies previously communicated in earlier audits. The auditor may also communicate other control matters deemed important, even if they do not meet the threshold of significant deficiencies. In performing this responsibility, the auditor must assess whether the identified deficiencies relate to areas of the financial statements that are important to users and consider the overall impact on financial reporting reliability.

**Part (ii): Matters to be Included in Written Communication**

The written communication of significant def…

Question 17

"Using the Work of Another Auditor" is a critical area in the audit of entities having branches or components audited by auditors other than the principal auditor. With reference to SA 600 – Using the Work of Another Auditor, explain:

Accepted Answer

**SA 600 – Using the Work of Another Auditor** addresses the auditor's responsibility when component auditors conduct audits of branches, subsidiaries, or divisions of a larger entity, requiring coordination between the principal auditor and other auditors.

**PART (1): NEED FOR COORDINATION AND PROPER UNDERSTANDING**

Coordination between the principal auditor and other auditor is essential to ensure **consistent and effective audit coverage** across all components of the entity. The coordination serves multiple critical objectives:

**1. Establishing Clear Authority and Responsibility:** The principal auditor must establish a clear understanding with the component auditor regarding their respective roles, responsibilities, and the extent of work to be performed. This prevents duplication of effort and ensures all significant areas are adequately audited.

**2. Communication of Audit Objectives and Materiality:** The principal auditor must communicate group-wide materiality and component materiality levels, so the component auditor performs testing at appropriate levels. This ensures that items below component materiality are not overlooked when they are material at the group level. Additionally, the principal auditor must communicate any group-wide matters, including related party transactions and accounting policies, to ensure consistent application.

**3. Assessment of Competence and Independence:** A proper understanding includes evaluating whether the component auditor …

Question 18

Hope Foundation, a registered non-governmental organisation (NGO), is engaged in social welfare activities across multiple states and receives funds from domestic as well as foreign donors. The organisation is governed by a Managing Committee and is required to comply with various statutes and funding agency requirements. While planning the statutory audit of the NGO, the auditor is required to obtain a thorough understanding of the organisation, its regulatory environment, internal systems and prior audit findings in order to design appropriate audit procedures. With reference to above, state the matters on which the auditor may concentrate while planning the audit of an NGO.

Accepted Answer

**Understanding the NGO and Its Operating Environment:** The auditor should gain a comprehensive understanding of Hope Foundation's nature, objectives, and operations. This includes understanding the multi-state social welfare activities, the structure of operations across different locations, organizational hierarchy, and the role of the Managing Committee in governance. The auditor should understand the NGO's mission, the beneficiary groups, program activities, and how funds are utilized for the stated objectives.

**Regulatory and Statutory Compliance Requirements:** The auditor should concentrate on understanding the NGO's regulatory obligations under various statutes. Key matters include: (a) **Income Tax Act 1961** - particularly sections relating to registration under Section 12A/80G, deduction eligibility, and filing requirements; (b) **Foreign Contribution (Regulation) Act (FCRA) 2010** - as the NGO receives foreign donations, compliance with FCRA registration, reporting, and restrictions on use of foreign funds is critical; (c) **State Charity/Registration Acts** - compliance with state-specific requirements for NGO registration; (d) **GST Compliance** - understanding exempt supplies and applicability of GST to various activities; (e) **Corporate Social Responsibility (CSR) Act 2013** - if the NGO receives CSR funding from companies.

**Funding Sources and Donor Requirements:** The auditor should examine the nature, amount, and conditions attached to domestic and fo…

Question 19

ABC Bank Limited has a substantial portfolio of advances comprising term loans, cash credit facilities and overdrafts. As at the balance sheet date, significant amounts of advances are outstanding and are required to be valued, classified and disclosed in accordance with applicable accounting standards, RBI norms and regulatory requirements. While carrying out the audit of advances, the auditor is required to obtain sufficient and appropriate audit evidence to ensure that the advances reported in the balance sheet are properly recorded, supported, valued and disclosed. With reference to the above, state the primary matters with respect to which the auditor should obtain audit evidence while carrying out the audit of advances.

Accepted Answer

While auditing advances portfolio, the auditor must obtain sufficient and appropriate audit evidence with respect to the following primary matters:

**Existence and Authenticity**: Evidence that all recorded advances actually exist and are genuine transactions. This includes verification of loan sanction letters, disbursement documents, customer applications, credit committee approvals, and authorization records. The auditor may inspect loan files, verify bank disbursement statements, and obtain direct customer confirmations.

**Completeness**: All outstanding advances as at balance sheet date are completely and accurately recorded in books. This involves reconciliation of loan register with general ledger, examination of disbursement records immediately post balance sheet date to identify year-end outstanding amounts, and obtaining direct confirmations from major borrowers.

**Valuation and Interest Accrual**: Advances are valued correctly with proper interest accrual as per loan terms. The auditor should test calculations of interest on all advances, verify application of agreed rates, examine interest demand notes and receipts, and confirm accrual methodology for various loan categories including restructured advances.

**Loan Loss Provisions and Impairment Assessment**: Provisions must be computed in accordance with Ind AS 109 and RBI's guidelines. The auditor should test the provisioning matrix, validate the Expected Credit Loss (ECL) model, review historical default rat…

Question 20

ABC & Co., Chartered Accountants, was appointed as the statutory auditor of Kimi Manufacturing Ltd. for the financial year ended 31st March 2025. CA Arjun, a senior partner of the firm, was designated as the Engagement Partner for the audit engagement. In accordance with SA 220, "Quality Control for an Audit of Financial Statements", CA Arjun took active steps to demonstrate leadership and responsibility for the overall quality of the audit. He communicated to the engagement team the importance of complying with professional standards, regulatory and legal requirements, and adherence to the firm's quality control policies and procedures. He also emphasised that the auditor's report should be appropriate in the circumstances and should be issued only after obtaining sufficient and appropria…

Accepted Answer

**Leadership Responsibilities of Engagement Partner under SA 220**

SA 220, 'Quality Control for an Audit of Financial Statements,' explicitly requires the engagement partner to take overall responsibility for managing and achieving quality throughout the audit engagement. The actions taken by CA Arjun comprehensively demonstrate these leadership responsibilities.

**Setting the Tone at the Top for Quality**

CA Arjun's consistent emphasis that audit quality is essential in performing audit engagements directly fulfills SA 220's requirement that the engagement partner establish a culture emphasizing quality consciousness. By repeatedly highlighting quality throughout the engagement, he creates a 'tone at the top' that influences the entire engagement team's approach and priorities. This leadership approach ensures that quality is not treated as a compliance checklist but as a fundamental value embedded in audit execution.

**Communication of Professional Standards and Compliance Requirements**

By communicating the importance of complying with professional standards, regulatory and legal requirements, and firm quality control policies, CA Arjun ensures that the engagement team understands its professional obligations and the mandatory nature of compliance. SA 220 requires the engagement partner to be responsible for appropriate actions by team members regarding quality. This communication mechanism achieves multiple objectives: it establishes clarity on expectations, reinforc…

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