Question 1

Which of the following is correct?

Accepted Answer

**Unable to provide answer** — The question references Statement I and Statement II, but their actual text is not provided in the question stem. To solve this MCQ correctly, the specific statements being compared must be available. Please provide the complete question including the content of both statements.

Question 2

Explain the categories of Agricultural Advances in case of Banks and related NPA norms.

Accepted Answer

**CATEGORIES OF AGRICULTURAL ADVANCES IN BANKS**

Agricultural advances by banks are categorized into two main types:

**1. Direct Agricultural Advances:**
These are advances extended directly to individual farmers or groups of farmers for agricultural operations. They include:

• **Short-term Crop Loans:** Advances up to 12 months for seasonal agricultural operations, purchased inputs, and seeds.

• **Medium-term Advances:** Advances with maturity of 1-3 years for purchasing agricultural machinery, equipment, or undertaking land development activities.

• **Long-term Advances:** Advances exceeding 3 years for land purchase, land reclamation, construction of farm buildings, horticulture, plantation development, and allied agricultural activities like dairy and fisheries.

**2. Indirect Agricultural Advances:**
These are advances extended to institutions and organizations engaged in agricultural development or marketing, including Agricultural Cooperative Societies, Agricultural Development Corporations, Agricultural Finance Corporations, and agro-processing enterprises.

**NPA NORMS FOR AGRICULTURAL ADVANCES**

RBI has prescribed specific NPA classification norms for agricultural advances that differ from standard commercial advances:

**For Direct Agricultural Advances to Farmers:**

• **Short-term Crop Loans:** An advance becomes non-performing if it remains unpaid for **two successive crop seasons or two years, whichever is longer**. This extended period recognizes crop se…

Question 3

You have been appointed auditor of Mrs. BLK Hospital. Discuss important points that would secure your attention in the audit.

Accepted Answer

**Audit of Mrs. BLK Hospital — Important Points Requiring Attention**

**1. Internal Control and Organisational Structure**
The auditor should review the organisational chart, delegation of authority, and internal control system prevalent in the hospital. A hospital has several departments (OPD, IPD, Operation Theatre, Pharmacy, Laboratory, Radiology, etc.) and the auditor must understand controls operating in each department.

**2. Registration and Licensing**
Verify that the hospital holds valid registration under the Clinical Establishments (Registration and Regulation) Act, 2010 (or the applicable State Act), NABH accreditation (if claimed), Bio-Medical Waste Management authorisation, PCPNDT registration, Narcotics and Psychotropic Substances licence, and fire NOC. Non-compliance with statutory requirements is a serious matter.

**3. Income Verification**
Hospital income arises from multiple streams: OPD consultation fees, IPD charges (room rent, nursing charges, operation charges), laboratory and diagnostic charges, pharmacy sales, ambulance charges, and canteen/cafeteria income. The auditor should:
- Verify that receipts are pre-numbered and all cancelled receipts are on record.
- Cross-check bed-occupancy registers with billing records to detect unrecorded income.
- Verify income from insurance companies and Third Party Administrators (TPAs) with claims settled statements.
- Check that package rates charged to patients are disclosed and revenue is recognised correctly.…

Question 4

Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor is that:

Accepted Answer

**Answer: (B)** Fraud is an intentional act.

The fundamental distinguishing factor between fraud and error is **intentionality**. According to SA 240, fraud is defined as an intentional misstatement or omission in the financial statements involving deception to obtain an unjust or illegal advantage. In contrast, an error is an unintentional misstatement or omission. This deliberate versus accidental nature forms the core distinction that auditors use to classify misstatements.

Option (A) is incorrect because both fraud and error can result in material or immaterial misstatements—materiality is not the distinguishing characteristic. Option (C) is incorrect as frauds are typically harder to detect than errors due to deliberate concealment and design to mislead. Option (D) is incorrect because it describes who may commit fraud (which is not exclusive to management or those charged with governance) rather than distinguishing fraud from error.

Question 5

In designing and performing test of controls, the auditor shall perform other audit procedures in conjunction with inquiry to obtain audit evidence about the operating effectiveness of the controls, including:
(i) How the controls were applied
(ii) The consistency with which they were applied
(iii) By whom or by what means they were applied
Which of the following is correct?

Accepted Answer

**Answer: (c)**

SA 330 (The Auditor's Responses to Assessed Risks) requires that when the auditor intends to rely on the operating effectiveness of controls, the auditor shall design and perform audit procedures to obtain sufficient appropriate audit evidence about the operating effectiveness of those controls. These audit procedures, performed in conjunction with inquiry, must obtain evidence about all three aspects: (i) how the controls were applied, (ii) the consistency with which they were applied, and (iii) by whom or by what means they were applied. All three elements are essential to substantiate that controls operated effectively throughout the audit period.

Question 6

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

Accepted Answer

The following statements are examined for correctness:

**(i) CORRECT.** The preparation of financial statements involves significant **management judgment** — regarding accounting estimates, classification, recognition, and measurement. This is an inherent feature acknowledged in **SA 200 (Overall Objectives of the Independent Auditor)**, which is why audit risk and professional skepticism are central to audit planning.

**(ii) INCORRECT.** An **audit programme cannot be standardized** and applied universally to all business units. As per **SA 300 (Planning an Audit of Financial Statements)**, the audit programme must be **specific, tailored, and particularized** to the nature, size, complexity, and risk profile of each entity. A generic programme fails to address entity-specific risks and controls.

**(iii) CORRECT.** **Inquiry alone does not provide sufficient appropriate audit evidence.** As per **SA 500 (Audit Evidence)**, inquiry is one of the audit procedures but must be corroborated by other procedures such as inspection, observation, confirmation, or recalculation. This is because responses to inquiries may be incomplete, biased, or unverified.

**(iv) CORRECT.** When an entity **changes its risk environment or internal controls**, this is a matter of significant importance to the auditor. As per **SA 315 (Identifying and Assessing the Risks of Material Misstatement)**, any change in controls requires the auditor to **re-evaluate** the design and operating effectiven…

Question 7

When obtaining an unmodified opinion on financial statements, SAM & Company used the following phrase:
"In our opinion, the accompanying financial statements give a true and fair view of [...]"
Which is the other phrase which is regarded as being equivalent to the above phrase and statement by SAM & Company?

Accepted Answer

**Answer: (a)**

According to SA 700 "Forming an Opinion and Reporting on Financial Statements," when an auditor forms an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the opinion must clearly state that the financial statements either **present a true and fair view** OR **give a true and fair view** — both phrases are regarded as equivalent. Additionally, the opinion statement must explicitly reference the applicable financial reporting framework for completeness and technical accuracy.

SAM & Company's phrase "In our opinion, the accompanying financial statements give a true and fair view of [...]" lacks the mandatory framework reference required by SA 700. Option (a) provides the equivalent and fully compliant formulation by retaining the core phrase "give a true and fair view" while adding the essential clause "in accordance with the applicable financial reporting framework."

Options (b), (c), and (d) are incorrect: (b) uses "true and correct" instead of "true and fair"; (c) omits the word "fair"; and (d) substitutes "complete and fair" for "true and fair," none of which are equivalent terminology under SA 700.

Question 8

Which of the following is not an example of an event or condition that may cast significant doubt on the going concern:

Accepted Answer

**Answer: (d)**

Among the options provided, **"Current year profit loss to loss after providing depreciation"** is not a standard indicator that may cast significant doubt on the going concern assumption.

Under SA 570 (Going Concern), the auditor should evaluate management's assessment of the entity's ability to continue as a going concern. Indicators of going concern doubts include: (a) **Negative or near zero operating cash flows** – this directly impacts the entity's ability to meet obligations; (b) **Adverse key financial ratios** – declining profitability, high leverage, or weak liquidity ratios signal financial stress; and (c) **Inability to pay creditors on due date** – this indicates immediate liquidity problems and threatens solvency.

Option (d) differs because depreciation is a **non-cash expense**. A company's shift from profit to loss in a single year, when measured after providing (deducting) depreciation, does not necessarily indicate going concern problems. Many entities experience temporary losses or one-off charges without losing their ability to continue operations. The critical factor is whether cash flows are sufficient to meet obligations—not whether accounting profit has turned negative in one period. A company could show an accounting loss yet maintain positive operating cash flows and meet all its creditor payments, indicating viable going concern status.

Options (a), (b), and (c) are direct, substantive indicators of financial distress or inabilit…

Question 9

Which of the following statements is not included in the section with the heading "Basis for Opinion" in the Auditor's Report?

Accepted Answer

**Answer: (a)**

The Basis for Opinion section in the Auditor's Report, as prescribed under SA 700 (Forming an Opinion and Reporting on Financial Statements), contains specific mandatory statements. Option (a) is incorrect because it states that the audit was conducted in accordance with **Accounting Standards**, whereas the actual statement required is that the audit was conducted in accordance with **Standards on Auditing (SA)** issued by the Institute of Chartered Accountants of India. Accounting Standards (AS/Ind AS) relate to the preparation and presentation of financial statements, not the conduct of audits. The Basis for Opinion section must explicitly mention compliance with SA requirements, not AS requirements. Options (b) and (d) essentially convey that the auditor obtained sufficient and appropriate audit evidence, which is a required statement. Option (c), despite its awkward wording, attempts to express that the evidence obtained forms the basis for the audit opinion, which is also a required element.

Question 10

Information about the going concern analysing account fluctuations by comparing current year to prior year implies analysing account fluctuations by comparing current year to prior year

Accepted Answer

**Answer: (a) or (b) — Trend analysis**

When analyzing account fluctuations by comparing the current year balance to the prior year balance, the auditor is performing **trend analysis**. Trend analysis involves examining financial data over multiple periods to identify patterns, directions, and magnitudes of change. Comparing year-on-year movements in account balances is the foundational approach to trend analysis, which helps assess sustainability of operations and identify unusual or unexplained variances that may indicate going concern issues. This technique is distinct from ratio analysis (which focuses on relationships between accounts) and other analytical procedures.

Question 11

Briefly explain the concept mentioned about whether a sampling and non-sampling risk exists, in respect to the audit. Explain the materiality considerations in the context.

Accepted Answer

**Part (a): Sampling Risk, Non-Sampling Risk, and Materiality Considerations**

**Sampling Risk** (as per **SA 530 – Audit Sampling**) is the risk that the auditor's conclusion based on a sample may differ from the conclusion that would be reached if the entire population were subjected to the same audit procedure. Sampling risk arises because the auditor does not test 100% of the population. It can lead to two types of erroneous conclusions: (i) for tests of controls – the auditor concludes controls are more effective than they actually are (risk of over-reliance), or less effective (risk of under-reliance); (ii) for substantive procedures – the auditor concludes a material misstatement does not exist when it does (risk of incorrect acceptance), or does exist when it does not (risk of incorrect rejection).

**Non-Sampling Risk** is the risk that the auditor reaches an erroneous conclusion for any reason **not related to sampling**. This includes use of inappropriate audit procedures, failure to recognise misstatements, or misinterpretation of evidence. Non-sampling risk can be reduced (though not eliminated) through proper planning, supervision, and quality control.

**Materiality Considerations:** Under **SA 320 – Materiality in Planning and Performing an Audit**, materiality directly influences sampling decisions. The auditor determines **overall materiality** for the financial statements and **performance materiality** (a lower threshold) to reduce the probability that un…

Question 12

The company has failed to rectify the fraud detected which would now be required to disclose in the Board's Report details of each of the fraud reported to the Audit Committee by the Board given during the year. Which of the following details is not required to be disclosed in the Board's Report?

Accepted Answer

**Answer: (A)**

When fraud is detected and required to be disclosed in the Board's Report, the disclosure requirements under Section 134 of the Companies Act 2013 and CARO 2020 mandate specific details. However, the **name of the person involved is not a mandatory disclosure requirement** in the Board's Report, particularly because: (1) ongoing investigation considerations may prevent identification, (2) confidentiality and privacy protections apply to individuals under investigation, and (3) the statutory requirement focuses on the fraud itself rather than personal identification. Conversely, the **nature of fraud** (option B), **approximate amount involved** (option C), and **remedial action taken** (option D) are all explicitly required disclosures under the applicable corporate governance framework. These three elements enable stakeholders to understand the fraud's character, financial impact, and corrective measures undertaken.

Question 13

A statement on Internal Control over Financial Reporting was issued by XYZ Health Limited with referred to a matter which was appropriately disclosed in the financial statements that, in the auditor's judgment, was of such importance that it was fundamental to users' understanding of the financial statements. What is this?

Accepted Answer

**Answer: (b) Emphasis of Matters**

As per SA 706 (Emphasis of Matter Paragraphs and Other Matter Paragraphs), an **Emphasis of Matter (EOM)** is a matter appropriately presented or disclosed in the financial statements that the auditor considers of such fundamental importance that it is essential to users' understanding of the financial statements. When the auditor identifies such a matter, a separate EOM paragraph is added to the audit report after the opinion paragraph to draw users' attention to that disclosure. In this case, since XYZ Health Limited's statement on Internal Control refers to a matter that is appropriately disclosed in the financial statements but deemed fundamental to understanding, this is an EOM situation.

Question 14

The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written engagement and shall include:
(i) The responsibilities of the auditor for preparing the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the preparation of the financial statements; and
(v) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content
Which of the following is correct?

Accepted Answer

**Answer: (c)**

Statement (i) is incorrect. The auditor is NOT responsible for preparing the financial statements; that is **management's responsibility**. The auditor is responsible only for conducting the audit and expressing an opinion on the financial statements prepared by management.

Statements (ii), (iii), and (iv) are all mandatory requirements under SA 210 (Standards on Auditing 210 – Agreeing the Terms of Audit Engagements). The engagement letter must record: the auditor's responsibilities (to conduct an audit per applicable standards and laws), management's responsibilities (to prepare financial statements in accordance with the applicable framework), and identification of the applicable financial reporting framework (e.g., Ind AS, AS).

While statement (v) is also a standard requirement per SA 210, option (c) containing (ii), (iii), and (iv) is the correct answer among the choices provided, as it includes only statements that are unquestionably mandatory without including the erroneous statement (i).

Question 15

Discuss audit procedures and substantive testing

Accepted Answer

**Part (a): Appropriate Sampling Approach for ABC Ltd (Large Company with Huge Transactions)**

For ABC Ltd, which is a large company with voluminous purchase and sales transactions, **Statistical Sampling** — specifically **Monetary Unit Sampling (MUS)**, also known as **Probability Proportional to Size (PPS) Sampling** — would be the most appropriate approach.

**Reasons for recommending Statistical Sampling:**

**1. Objectivity and Scientific Basis:** Statistical sampling allows the auditor to quantify sampling risk and draw statistically valid conclusions about the population. Since ABC Ltd has huge transactions, subjective judgement alone may not provide sufficient audit evidence. As per **SA 530 (Audit Sampling)** issued by the ICAI, statistical sampling enables the auditor to measure the sufficiency of audit evidence obtained.

**2. Large Population Size:** With a large volume of purchase and sales transactions, testing every item is impractical. Statistical sampling provides a structured method to select a representative sample, ensuring that conclusions drawn are defensible and measurable.

**3. Monetary Unit Sampling (MUS) is Particularly Suitable Because:**
- Each rupee in the population has an equal probability of being selected, meaning **larger-value transactions have a higher chance of selection**. This is ideal for purchase and sales where high-value transactions carry greater audit risk.
- It automatically focuses attention on material items without eliminati…

Question 16

For reporting under clause (vi) of paragraph 3 of Companies (Auditor's Report) Order 2020, which of the following points the auditor may consider?

Accepted Answer

**Answer: (C)**

Clause (vi) of paragraph 3 of Companies (Auditor's Report) Order 2020 (CARO 2020) requires the auditor to report on fraud or suspected fraud involving officers, employees, or third parties affecting the company's financial statements. When determining what fraud matters are reportable under this clause, the auditor must apply the **principles of materiality outlined in Standards on Auditing** (particularly SA 240 - The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements). The auditor's judgment on materiality determines whether detected or suspected fraud must be reported. Option (A) is incomplete as it omits the materiality consideration. Option (B) is incorrect—CARO 2020 requires reporting on both **actual and suspected fraud**, not exclusion of suspected fraud. Option (D) relates to auditor withdrawal, which is outside the scope of fraud reporting requirements.

Question 17

CA A explained the circumstances to Mr. R in which, when the corresponding figures are presented, the financial statements of prior period or corresponding figures. Which of the following is correct?

Accepted Answer

**Answer: (iii) and (iv) are both correct circumstances; if selecting one, (iv) Prior Period Financial Statements not audited is most commonly emphasized.**

SA 710 (Standards on Auditing 710) – Comparative Information addresses the handling of corresponding figures when prior period financial statements are presented. The standard specifically identifies key circumstances affecting audit procedures and reporting:

**Circumstance (iii):** When prior period financial statements were audited by another auditor, the current auditor must determine the audit status and, if the prior auditor is not continuing, assess whether material misstatements existed. Disclosure in the audit report may be required (e.g., "as audited by another auditor").

**Circumstance (iv):** When prior period financial statements were not audited (or were compiled or reviewed rather than audited), this must be clearly disclosed. SA 710.11 requires prominent disclosure of this fact in the audit report, as it significantly affects the level of assurance on comparative figures.

Options (i) and (ii) are poorly worded and do not correctly represent SA 710 requirements. While (i) alludes to material misstatements in prior period FS (covered under SA 710.12), its phrasing is ambiguous and grammatically incomplete.

Both (iii) and (iv) represent valid circumstances under SA 710 that require specific handling. However, **(iv) is the more explicitly tested scenario**, as the non-audit status of prior period FS is a …

Question 18

Audit procedures for assets and substantive testing

Accepted Answer

**Part (a): Audit of Fixed Assets (PPE) — CARO 2020 Clause 1 and Substantive Testing**

Under **Clause 1 of CARO 2020**, the auditor must report whether the company maintains proper records showing full particulars including quantitative details and situation of **Property, Plant and Equipment (PPE)** and intangible assets; whether these assets have been physically verified by management at reasonable intervals; whether any discrepancies were noticed and properly dealt with; whether the title deeds of immovable properties (other than leasehold) are held in the name of the company or are pending transfer; whether revaluation of PPE or intangible assets has been carried out, and if yes, whether the revaluer is a registered valuer under Section 247 of the Companies Act 2013; and whether any proceedings are initiated or pending for holding benami property.

**Substantive Testing Procedures for Fixed Assets:**
(i) Obtain the Fixed Asset Register (FAR) and reconcile the closing balance with the balance sheet figure.
(ii) Physically verify a sample of assets — check existence, condition, and location; reconcile discrepancies with FAR.
(iii) Vouch additions during the year to purchase invoices, board approvals, and capital work-in-progress records.
(iv) Inspect original title deeds and land records for immovable properties; verify they are in the company's name.
(v) Verify the depreciation computation is in accordance with **Schedule II of the Companies Act 2013** or Ind AS 16 / AS 1…

Question 19

The auditors should Credit and accounts as NPL if _____ amount due, as mentioned in the agreement, is not paid fully within _____ days from next statement date.

Accepted Answer

**Answer: (a)**

Under the RBI guidelines on asset classification and the Standard on Auditing applicable to banks, an account should be classified as Non-Performing Asset (NPA) if the **total amount due** remains unpaid for more than **90 days** from the next statement date. This is the standard criterion for credit account classification: when principal or interest, or any dues under the credit agreement, is outstanding beyond 90 days, the asset transitions to NPA status and must be provisioned accordingly.

Question 20

Audit procedures and internal controls

Accepted Answer

**Part (a): Auditor Prevented from Computer-Driven Procedures**

When an auditor is prevented from using computer-driven (Computer Assisted Audit Techniques – **CAATs**) procedures in the audit of ABXZ Ltd, the situation constitutes a **limitation on the scope of audit**. The auditor should deal with this situation as follows:

**Step 1 – Understand the reason for restriction:** The auditor must first determine whether the restriction is imposed by management or arises from technical/system constraints. If management is preventing access deliberately, it raises concerns about integrity and completeness of records.

**Step 2 – Assess significance:** The auditor evaluates how critical the computer-driven procedures were to obtaining sufficient appropriate audit evidence. If CAATs were intended to test large volumes of transactions, their absence is significant.

**Step 3 – Consider alternative procedures:** Where feasible, the auditor should design **manual audit procedures** to achieve the same audit objectives — e.g., manual test of controls, physical verification, third-party confirmations, analytical procedures on printed reports.

**Step 4 – Evaluate impact on audit opinion:** If alternative procedures cannot adequately substitute CAATs, and the restriction is material and pervasive, the auditor should issue a **qualified opinion or disclaimer of opinion** under **SA 705 (Revised) – Modifications to the Opinion in the Independent Auditor's Report**. If not pervasive, a qua…

Question 21

The auditor finds out there is something unusual about the balances outstanding in the receivable and the auditor is required to look at how the management explained such unusual balances. The auditor has identified a particular debit balance on a receivable but there might be a misstatement of cash and the detection of the misstatement is being prevented by crediting the amount received subsequently to the account of customer not in
What is the kind of fraud the auditor has found in the above case?

Accepted Answer

**Answer: (b)**

The auditor has identified **cash skimming** fraud. In this scheme, cash received from Customer A is not recorded in their account; instead, it is credited to a different customer's account (Customer B). This technique masks the misappropriation by (1) creating an unusual debit balance on Customer A's account (showing they still owe money despite payment), (2) falsely crediting Customer B's account, and (3) preventing detection because the books appear to balance even though cash has been diverted. The subsequent credit to the wrong customer account is the concealment mechanism characteristic of cash skimming or lapping fraud—cash is received but improperly recorded to hide its theft.

Question 22

A Ltd. has been assigned a Cash Credit limit of INR 20 lacs as against its Book Debts furnished as securities. Which of the following will apply?

Accepted Answer

**Answer: (e) Hypothecation**

When Book Debts are furnished as security for a Cash Credit limit, **hypothecation** is the applicable security mechanism. Hypothecation is a charge on movable property (including intangible assets like Book Debts or accounts receivable) without transfer of possession or ownership. The borrowing company retains both the right to possession and the ownership of the debts while the lender (bank) holds a charge against them as security. In a CC facility against Book Debts, the borrower continues to collect the receivables from customers, but the bank's security interest is protected through the hypothecation charge. This distinguishes it from pledge (which requires physical delivery), mortgage (applicable to immovable property), and assignment (which transfers rights completely).

Question 23

Consider the following implications of audit, there is a risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SAs.

Accepted Answer

**Answer: (a)**

The risk that material misstatements will not be detected despite proper audit planning and execution refers to the **inherent limitations of an audit**. These limitations are **inherent** (built into the nature of auditing itself) and **unavoidable** (cannot be eliminated even with meticulous audit procedures).

As per SA 200, even properly conducted audits have inherent limitations because: (1) audit evidence is persuasive, not conclusive; (2) audit procedures cannot test all transactions due to practical and cost constraints; and (3) some matters (like management intent, future events) are not fully susceptible to audit verification. These are fundamental to the audit process and cannot be avoided by better planning or execution.

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

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap