Question 1

Examine with reasons (in short) whether the following statements are correct or incorrect: (Attempt any 7 out of 8)

Accepted Answer

The student is required to attempt any **7 out of 8** sub-parts. All 8 are addressed below for completeness.

**(i) INCORRECT.** As per **SA 200** (Overall Objectives of the Independent Auditor), the auditor cannot reduce audit risk to zero. Due to the **inherent limitations** of an audit (use of sampling, reliance on management representations, nature of audit evidence), the auditor can only reduce audit risk to an **acceptably low level**, not eliminate it entirely. Absolute assurance is not attainable.

**(ii) INCORRECT.** The statement contains two errors. First, under **SQC 1** (Quality Control for Firms that Perform Audits and Reviews), it is the **firm** (not the engagement partner individually) that is required to establish policies and procedures for timely assembly of audit files. Second, the prescribed time limit for completing the assembly of the final audit file is ordinarily not more than **60 days** after the date of the auditor's report — not 30 days as stated.

**(iii) CORRECT.** As per **SA 210** (Agreeing the Terms of Audit Engagements), it is in the interest of both the client and the auditor that an **engagement letter** is sent before the commencement of the audit to avoid misunderstandings. The engagement letter ensures each party is clear about the **nature of the engagement**, the scope, responsibilities, and basis of fees. The statement is therefore correct.

**(iv) INCORRECT.** As per **SA 510** (Initial Audit Engagements — Opening Balances), if the…

Question 2

………..is a possible obligation that arises from the past events and whose existence will be confirmed only by the occurrence/non occurrence of one or more uncertain future events not wholly within the control of the entity:

Accepted Answer

**Answer: (C) Contingent Liability**

As per **AS 29 – Provisions, Contingent Liabilities and Contingent Assets**, a **Contingent Liability** is defined as a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A Provision, by contrast, is a present obligation where an outflow of resources is probable and can be reliably estimated.

Question 3

Which of the following is not correct with respect to the inventory held by Octopus Limited:

Accepted Answer

**Answer: (B)**

Inventory held by a third party on behalf of the company (e.g., goods held by a consignee or warehouse keeper) **should be included** in the company's inventory balance, as the company retains ownership of such goods. Excluding it would be incorrect. Option (A) relates to the **completeness** assertion, (C) reflects the measurement rule under **AS 2 (Valuation of Inventories)**, and (D) relates to the **cut-off** assertion — all of which are correct statements.

Question 4

If the management of Octopus Ltd. refuses to allow the auditor, to send the confirmation request to the debtors, the auditor should:

Accepted Answer

**Answer: (C)**

As per **SA 505 (External Confirmations)**, if management refuses to allow the auditor to send confirmation requests, the auditor should not simply comply or withdraw. Instead, the auditor must **inquire into the reasons for the refusal**, evaluate the validity and reasonableness of those reasons, and then **design alternative audit procedures** to obtain sufficient appropriate audit evidence regarding the debtor balances. The auditor should also assess whether the refusal itself indicates a risk of material misstatement or fraud.

Question 5

Which of the following statements is not true so far as the liabilities of a company are concerned:

Accepted Answer

**Answer: (A)**

Liabilities represent the financial obligations of a company to **outsiders/third parties** — they do **not** include owner's funds (equity/capital). Owner's funds are classified separately as **Shareholders' Equity** or **Net Worth** under Schedule III of the Companies Act, 2013. Statements (B) and (C) are both correct — liabilities do include borrowings, trade payables, other current liabilities and provisions, and verification of liabilities is equally important as verification of assets to ensure the balance sheet presents a true and fair view.

Question 6

Statement 1: Confirmations as well as undelivered letters should be given/returned to the auditor and not to the client. Statement 2: When no reply is received, the auditor should perform alternate procedures regarding the balances:

Accepted Answer

**Answer: (C)**

Both statements are correct as per **SA 505 (External Confirmations)**. Statement 1 is correct — confirmation requests and undelivered letters must be returned directly to the auditor (not the client) to maintain control over the confirmation process and prevent manipulation. Statement 2 is also correct — when no reply is received to a confirmation request, the auditor is required to perform **alternative audit procedures** to obtain sufficient appropriate audit evidence about the balance in question.

Question 7

After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and file a notice of such appointment with registrar within:

Accepted Answer

**Answer: (C)**

As per **Section 139(1) of the Companies Act, 2013**, every company shall inform the auditor of his appointment and also file a notice of such appointment with the **Registrar of Companies within 15 days** of the meeting in which the auditor is appointed.

Question 8

If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XYZ & Associates shall take corrective actions within………….days. What is the prescribed limit:

Accepted Answer

**Answer: (B)**

As per the proviso to **Section 141(3)(d)(i) of the Companies Act 2013** read with **Rule 10 of the Companies (Audit and Auditors) Rules 2014**, if a relative of a partner of the audit firm holds securities in the company exceeding the prescribed limit, it results in disqualification. The prescribed limit is **face value of ₹1,00,000**. However, if such disqualification arises after the appointment, the auditor must take corrective action within **60 days** of such disqualification to cure the defect (i.e., the relative must divest the excess securities within 60 days).

Question 9

Under which section reporting of fraud by an auditor to the Central Government is required and what is the amount of fraud:

Accepted Answer

**Answer: (A)**

Under **Section 143(12) of the Companies Act, 2013**, if an auditor in the course of the performance of duties has reason to believe that an offence of fraud involving amounts of **₹1 crore or above** is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the **Central Government** within the prescribed time and manner. The threshold of ₹1 crore was prescribed under Rule 13 of the Companies (Audit and Auditors) Rules, 2014.

Question 10

What is the requirement for ABC Ltd as per the relevant provisions regarding maintenance of cost records:

Accepted Answer

**Answer: (A) Maintenance of cost records is mandatory, in form CRA-1.**

Under **Rule 3 of the Companies (Cost Records and Audit) Rules, 2014** framed under **Section 148 of the Companies Act, 2013**, every company engaged in the production of goods or providing services as specified in **Table A (regulated sectors)** or **Table B (non-regulated sectors)** of the said Rules is required to maintain cost records, **if its overall turnover from all products and services is ₹35 crores or more** during the immediately preceding financial year.

In the given case, ABC Ltd. deals in **chocolate and coffee**, both of which are food and beverage products covered under **Table B (non-regulated sector)** of the Rules. The **gross turnover of ABC Ltd. is ₹105 crores**, which clearly exceeds the threshold of ₹35 crores. Therefore, maintenance of cost records is **mandatory** for ABC Ltd.

The **prescribed format for maintenance of cost records is Form CRA-1**, as specified under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. This form prescribes the particulars to be included in the cost records such as material costs, employee costs, utilities, depreciation, and other overheads.

Hence, **Option (A)** is correct — maintenance of cost records is mandatory for ABC Ltd. in **Form CRA-1**.

Question 11

Under relevant clause of CARO, 2016, XYZ & Associates is required to report the extent of arrears of Employees Provident Fund as at the balance sheet date:

Accepted Answer

**Answer: (C) Exceeding 6 months**

Under **Clause (vii)(a) of CARO, 2016**, the auditor is required to report whether the company is regular in depositing undisputed statutory dues including **Employees' Provident Fund** with the appropriate authorities. If not regular, the auditor must state the extent of arrears of outstanding statutory dues as at the balance sheet date **exceeding a period of 6 months** from the date they became payable.

Question 12

The auditor shall update and change ______as necessary during the course of the audit.

Accepted Answer

**Answer: (B)** The auditor shall update and change **the overall audit strategy and the audit plan** as necessary during the course of the audit. SA 300 requires the auditor to establish an overall audit strategy at the planning stage. However, as the audit progresses, circumstances may change, new information may emerge, or the auditor's risk assessment may be refined based on audit procedures performed. Both the overall audit strategy and the audit plan must be flexible and responsive to these changes to remain relevant and effective. While the audit program (option D) is also updated, the standard specifically requires updating both the strategy and plan together.

Question 13

A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request is:

Accepted Answer

**Answer: (D)**

A negative confirmation request is a specific type of external confirmation where the confirming party is instructed to respond to the auditor **only if they disagree** with the information provided in the request. This is distinct from a positive confirmation request, which requires a response regardless of agreement or disagreement. In a negative confirmation, non-response is treated as evidence of the confirming party's agreement or acceptance of the stated information. Negative confirmations are typically used when the auditor believes the risk of misstatement is low and the population of items is homogeneous.

Question 14

Direct financial interest or materially significant indirect financial interest in a client is an example of:

Accepted Answer

**Answer: (B)**

Direct financial interest or materially significant indirect financial interest in a client represents a **self-interest threat** to auditor independence. A self-interest threat arises when the auditor's personal financial interests could incentivize them to act in their own financial benefit rather than in accordance with professional standards and duties. When an auditor has a stake in the client's financial performance or ownership, there is a direct conflict of interest. This could influence judgment on matters such as revenue recognition, asset valuation, or reporting outcomes that affect the client's profitability or financial position.

Question 15

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express:

Accepted Answer

**Answer: (C)**

When an auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances, SA 705 (Modifications to the Opinion in the Independent Auditor's Report) requires the auditor to determine the appropriate modified opinion based on the pervasiveness of the limitation. If the limitation affects only specific items and is not pervasive to the financial statements, a **qualified opinion** is expressed. If the limitation is so significant that it affects the overall integrity of the financial statements, a **disclaimer of opinion** is expressed. The choice between the two is made in accordance with SA 705's guidance on the nature and extent of the scope limitation. Opening balances are fundamental to comparative figures and the current year's results; inability to obtain sufficient evidence creates a limitation in audit scope that necessitates modification of the audit opinion, but the type of modification depends on circumstances.

Question 16

If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances that bring into question his ability to continue performing the audit, he shall:

Accepted Answer

**Answer: (C)**

When an auditor encounters exceptional circumstances resulting from fraud that bring into question their ability to continue performing the audit, the auditor must first **determine the professional and legal responsibilities applicable in the circumstances**. This is the foundational step before taking any further action. The auditor cannot simply withdraw immediately without understanding their legal and professional obligations. Instead, the auditor should assess what responsibilities apply (which may include consulting with legal advisors, considering regulatory requirements, and evaluating implications for stakeholder communication) and then decide the appropriate course of action based on those determined responsibilities. Options (A), (B), and (D) bypass this critical analysis or involve incorrect procedures (asking management for permission to withdraw is not appropriate; the auditor makes this determination independently).

CA Inter FM + SM

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap