Question 1

Is CA Rahul Dhawan right in changing the planned audit strategy and plan after the audit team has started reading up on the company?

Accepted Answer

**Answer: (B)**

CA Rahul Dhawan is not right in changing the overall audit strategy after the team has started reading up on the company. However, the audit plan can be revised.

Under SA 300, **Planning an Audit of Financial Statements**, the auditor must develop an overall audit strategy and a detailed audit plan before commencing the audit. The overall audit strategy establishes the scope, timing, direction, and nature of the audit, and is based on preliminary risk assessments and client knowledge obtained during the engagement. Once established, the overall audit strategy should not be changed arbitrarily because it forms the fundamental framework for the audit.

However, SA 300 does recognize that as the audit progresses and the auditor obtains additional information (such as through understanding the business, industry, and control environment), the **audit plan—the detailed specification of audit procedures**—may need to be revised. These revisions to the plan are appropriate responses to new insights gained during the audit process, without requiring a complete restart of the overall audit strategy.

The distinction is critical: the overall strategy is the macro-level framework; the plan is the micro-level execution. The former should remain stable unless there are substantial changes in circumstances; the latter should be flexible and adaptive.

Question 2

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

Accepted Answer

**Note:** Attempt any 7 out of 8. All 8 are addressed below.

**(i) CORRECT**
The concept of **materiality** is indeed an important and relevant consideration for the auditor under **SA 320 – Materiality in Planning and Performing an Audit**. Materiality guides the auditor in planning the nature, timing, and extent of audit procedures, and in evaluating the effect of identified misstatements on the financial statements. An item is material if its omission or misstatement could influence the economic decisions of users.

**(ii) INCORRECT**
Amounts received from receivables on the last day of the year but not yet credited/accounted in the bank do **not automatically represent defalcation**. Such items may be legitimate **transit items or timing differences** appearing in the bank reconciliation statement. Defalcation implies intentional misappropriation. The auditor must investigate further before concluding fraud. The statement is factually incorrect.

**(iii) INCORRECT** *(Note: The statement appears to contain a transcription error; interpreted as "misstatements can arise from fraud or error.")*
If so interpreted, the statement is **CORRECT** — per **SA 240 – The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements**, misstatements in financial statements can arise from **fraud** (intentional) or **error** (unintentional). As stated in the question ("goods sold or loss"), it is incorrect — misstatements do not arise merely from goods sold or losse…

Question 3

... is a possible obligation that arises from the 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

Accepted Answer

**Answer: (c)**

The definition describes a **Contingent Liability**. Per Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets), a contingent liability is defined as a possible obligation arising from past events 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. Options (a) and (c) are identical in meaning; (c) presents the formal capitalized technical term. A reserve is an appropriation of profits, not a contingent obligation. A liability is a present obligation, whereas a contingent liability is merely possible.

Question 4

Analyze how risks in the IT system if not mitigated could have an impact on the audit.

Accepted Answer

**IT Risks and Their Impact on Audit**

IT risks refer to vulnerabilities and threats in information systems that could lead to unauthorized access, data loss, system failures, or inaccurate financial information. If not mitigated, these risks have significant implications for the audit:

**Impact on Audit Planning and Risk Assessment:** Unmitigated IT risks directly affect the auditor's understanding of the entity's control environment. Per SA 315, the auditor must assess the risk of material misstatement. IT control weaknesses increase inherent risk, necessitating higher audit risk and expanded procedures. The auditor may need to engage IT specialists, increasing audit complexity and cost.

**Impact on Control Assessment:** IT risks compromise the design and operating effectiveness of internal controls. Weak system access controls, inadequate segregation of duties in automated processes, or poor change management procedures mean controls cannot be relied upon. This forces the auditor to perform more extensive substantive procedures rather than relying on control testing, per SA 330. The auditor cannot achieve audit efficiency when IT controls are deficient.

**Impact on Audit Evidence and Data Integrity:** If IT systems lack proper controls, the reliability of electronic evidence and financial data becomes questionable. Risks like unauthorized transactions, data manipulation, or system errors may go undetected. The auditor must obtain sufficient appropriate evidence per SA …

Question 5

Under the provision of Section 143(3) of Companies Act, 2013, every statutory auditor may request a person who is a director or any person (not being an auditor of that company). In this context, discuss meaning of term "business relationship"?

Accepted Answer

**Business Relationship** under Section 143(3) of the Companies Act, 2013, in the context of auditor independence, refers to any commercial, financial, or professional transaction or dealing between the auditor (or his firm) and the company being audited, other than the audit engagement itself.

**Nature and Scope of Business Relationship:**

A business relationship encompasses multiple categories: (1) **Direct Financial Relationships** such as loans, advances, guarantees, bank deposits, or equity investments by the auditor or his firm in the company; (2) **Trading Relationships** including supply of goods, provision of services, or purchase of materials from/to the company; (3) **Professional Services** such as consultancy, tax advisory, legal services, or management advisory services provided by the auditor to the company; (4) **Shared Commercial Interests** including joint ventures, partnerships, or shared ownership in business enterprises; (5) **Related Party Transactions** with subsidiaries, associates, or related entities of the company.

**Significance in Audit Context:**

The concept of business relationship is relevant to Section 143(3) because an auditor with a material business relationship cannot objectively exercise the statutory rights and duties prescribed under this section. The auditor's right to access books of accounts, require information and explanations, and examine officers of the company requires complete independence and objectivity. Any business rela…

Question 6

For continuing with the litigation going against the company which of the following audit procedures should be performed?

Accepted Answer

**Answer: (A)**

Option A is correct. Under **SA 501 (Audit Procedures Regarding Litigation, Claims and Assessments)**, inquiry of management is a fundamental audit procedure. The auditor must specifically inquire of management regarding the existence, status, and likely outcome of any litigation, claims, and assessments. Additionally, inquiring in-house legal counsel is explicitly required under SA 501 to obtain audit evidence about litigation continuing against the entity.

While options B and C (reviewing board minutes and legal expense accounts) are also valid supplementary procedures under SA 501, option A represents the primary and most direct audit procedure for litigation.

Option D is incorrect because it excludes "obtaining written representations from the management," but written confirmations from legal counsel are mandatory audit procedures under SA 501 and cannot be omitted.

Question 7

Materialization of... engagements, procedures designed to provide evidence of compliance by engagement teams with the firm's quality control policies and procedures is known as

Accepted Answer

**Answer: (a)**

Monitoring refers to the procedures designed to provide evidence that an audit firm's system of quality control is operating effectively. These ongoing procedures are performed to assess whether engagement teams are complying with the firm's established quality control policies and procedures. Monitoring is a key component of a firm's quality control system and involves periodic review of selected engagements to ensure compliance with relevant professional standards and the firm's own quality requirements.

Question 8

Discuss the reporting requirements regarding statutory duties and Internal Audit as per CARO, 2020.

Accepted Answer

**Reporting Requirements under CARO, 2020 — Statutory Dues and Internal Audit**

**CARO 2020** (Companies (Auditor's Report) Order, 2020) issued under Section 143(11) of the Companies Act, 2013, prescribes specific reporting requirements on statutory dues and internal audit in the auditor's report.

**A. Statutory Dues — Clause 3(vii)**

The auditor is required to report on statutory dues under two sub-clauses:

**Clause 3(vii)(a) — Regularity in Deposit:**
The auditor must state whether the company is **regular in depositing undisputed statutory dues** with the appropriate authorities. The statutory dues covered include:
- Goods and Services Tax (GST)
- Provident Fund (PF)
- Employees' State Insurance (ESI)
- Income Tax
- Sales Tax / Value Added Tax
- Service Tax
- Customs Duty and Excise Duty
- Cess
- Any other statutory dues

If the company is **not regular**, the auditor must disclose the **nature and amount of arrears** of outstanding statutory dues as at the last day of the financial year that have been outstanding for a period of **more than six months** from the date they became payable.

**Clause 3(vii)(b) — Disputed Dues:**
Where dues of income tax, sales tax, service tax, customs duty, excise duty, VAT, GST, or cess have **not been deposited on account of any dispute**, the auditor must report:
- The **amount involved** in the dispute; and
- The **forum where the dispute is pending** (e.g., Commissioner of Appeals, ITAT, High Court, Supreme Court, etc.).

The key d…

Question 9

During audit of M/s Bansal Traders, the auditor came to know that an amount is locking in account receivables. Moreover, Management of Bansal Tarla Ltd. is worried about the system over running from accounts receivables and after receivement, some balance amount is expected as fire sale or obsolescence. The material could be suppressed resulting into frauds and finally incurring losses.

Accepted Answer

**Audit of Receivables — M/s Bansal Traders: Case Analysis**

The scenario presents three interlinked audit concerns that the auditor must address systematically.

**(a) Amount Locked in Accounts Receivables**

When receivables remain outstanding beyond normal credit periods, it indicates a risk of **irrecoverability or overstatement of debtors**. The auditor should perform an **aging analysis** of the debtor ledger to identify overdue balances. **Subsequent receipts testing** — verifying whether amounts shown as receivable at year-end have been collected post balance sheet date — is a primary procedure here. The auditor must also verify whether **adequate provision for doubtful debts** has been created as per the accounting policy, ensuring the financial statements are not overstated. Reference is made to **SA 330** (The Auditor's Responses to Assessed Risks) for designing substantive procedures.

**(b) System Overrunning Accounts Receivables**

Management's concern about the system overrunning the receivables module points to a **weakness in IT general controls and application controls** over the receivables system. The auditor should evaluate whether the system correctly posts receipts, raises invoices, and maintains accurate balances. Any system override could allow unauthorized manipulation of debtor balances. Under **SA 315** (Identifying and Assessing the Risks of Material Misstatement), the auditor must understand the entity's information system relevant to financial …

Question 10

Is the understanding regarding adequacy of fraud risk posed by ML in audit correct?

Accepted Answer

**Answer: Cannot be determined** — The question references 'point 1' and 'point 2' regarding fraud risk assessment and the adequacy of management representations (or the concept denoted by 'ML'), but these specific points are not provided in the question statement. Without visibility of the two comparative statements being evaluated, it is impossible to determine which understanding is correct. To answer this MCQ properly, the candidate requires the full text of point 1 and point 2 against which the fraud risk assessment adequacy is being evaluated under SA 240.

Question 11

The concept of materiality is applied by the auditor

Accepted Answer

**Answer: (c)** The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit. SA 320 establishes that materiality is used throughout the audit process in three distinct phases: (i) **Planning phase** — the auditor determines overall materiality and performance materiality to establish the scope and nature of audit procedures; (ii) **Performance phase** — the auditor applies materiality thresholds when selecting audit samples and determining the nature, timing, and extent of audit procedures to be performed; and (iii) **Evaluation phase** — the auditor evaluates whether identified misstatements, either individually or in aggregate, are material to the financial statements. Therefore, materiality is not limited to any single stage but is fundamental throughout the audit engagement.

Question 12

What is the kind of fraud that the auditor has faced in the above case?

Accepted Answer

**Answer: Cannot be determined confidently without the case scenario.**

The question refers to 'the above case', but no case scenario has been provided. To correctly identify the type of fraud (Teeming and Lading, Cash Skimming, Defalcation with cash infusion, or Misappropriation of receivables), the specific facts about how the fraud was perpetrated must be examined:

• **Teeming and Lading**: Using fresh customer receipts to cover old customer balances without proper crediting
• **Cash Skimming**: Removing cash before recording in books
• **Defalcation with cash infusion**: Unauthorized withdrawal later covered by proper cash deposit
• **Misappropriation of receivables**: Money taken from customers without recording

Please provide the case scenario details so the correct answer can be determined.

Question 13

XYZ Ltd. during final audit in the subsequent period does during its financial year 2021-22 is a serious error audit. You have been supposed as an auditor and you want to verify the additions made to property during the audit. Suggest the audit procedures for verification of the same.

Accepted Answer

**Audit Procedures for Verification of Additions to Property**

When verifying additions made to property (i.e., fixed assets / Property, Plant & Equipment) during the financial year 2021-22, the auditor should carry out the following procedures in accordance with **SA 500 (Audit Evidence)** and **SA 315 (Identifying and Assessing Risks)**:

**(a) Obtain and Review the Fixed Asset Register**
The auditor should obtain the **Fixed Asset Register (FAR)** and trace all additions recorded during the year. Each addition should be cross-verified with the corresponding entry in the books of account to ensure completeness and accuracy.

**(b) Examine Supporting Documentation (Vouching)**
For each addition, the auditor should inspect supporting documents such as:
- **Purchase invoices / vendor bills** to confirm the cost of acquisition.
- **Purchase orders and goods receipt notes (GRN)** to establish that the asset was actually received.
- **Board resolutions or capital expenditure (CAPEX) approvals** to confirm authorisation.
- **Agreements or contracts** in the case of constructed assets or assets acquired under hire purchase / lease.

**(c) Verify Ownership (Title)**
The auditor must verify that **legal title** to the property vests in XYZ Ltd. This includes examination of:
- **Title deeds** for land and buildings.
- **Registration certificates** for vehicles, plant and machinery where applicable.
- **Insurance policies** in the name of the company, which also corroborate existence …

Question 14

If the financial statements of the prior period were audited by a predecessor auditor, in addition to checks on amounts, what is needed to be stated.

Accepted Answer

When the financial statements of the prior period were audited by a predecessor auditor, the successor auditor must perform audit procedures on opening balances as per **SA 510 (Initial Audit Engagements — Opening Balances)**. In addition to conducting checks on the amounts, the following aspects need to be stated:

**Adjustments to Opening Balances**: Any differences identified between the prior period closing balances and the current period opening balances must be clearly stated in the financial statements. These adjustments should be supported by evidence from the predecessor auditor's records and documented in the working papers.

**Consistency of Accounting Policies**: The successor auditor must state that the accounting policies applied to opening balances are consistent with those applied in the current period. If accounting policies have changed, such changes and their impact must be explicitly stated in the financial statements.

**Basis of Opening Balance Verification**: The successor auditor should state the basis on which opening balances have been verified—whether through review of predecessor's audit working papers, direct confirmation with the predecessor auditor, or other audit procedures. This establishes the evidence underlying the opening balance figures.

**Nature and Extent of Predecessor's Audit**: The scope and extent of the predecessor's audit work on those balances should be stated, particularly if the predecessor auditor had any scope limitations or…

Question 15

When corresponding figures are presented, the auditor's opinion shall not refer to the corresponding figures except in limited circumstances. Explain these circumstances.

Accepted Answer

As per **SA 710 — Comparative Financial Statements**, when corresponding figures are presented alongside current period figures, the auditor's opinion does not separately refer to them as a general rule, since they are presented only for comparative purposes. However, the auditor's opinion shall refer to corresponding figures in the following **limited circumstances**:

**1. Different Auditor Scenario:** When the corresponding figures were audited by a **different auditor** (predecessor auditor or a different firm), the current auditor must clearly disclose this fact. The opinion should state that the corresponding figures were audited by another auditor and reference their report. This transparency is essential because users need to know the quality and nature of assurance provided on comparative data.

**2. Prior Qualified, Adverse, or Disclaimer Opinion:** When the auditor had previously expressed a **qualified opinion, adverse opinion, or disclaimer of opinion** on the corresponding figures in the prior year's audit report, and the matter remains relevant, the current opinion should refer to this fact. This alerts users to unresolved issues in the prior period's financial statements.

**3. Material Restatement or Change in Accounting Policy:** When the entity has **restated corresponding figures** due to correction of material errors or changes in accounting policies, the auditor should refer to this in the opinion. The auditor may be required to provide additional explan…

Question 16

Explain and state the role of auditor with respect to the following in case of a hotel:

Accepted Answer

**Role of Auditor with Respect to Hotel Operations**

**(i) Occurrence of Problems in Hotel Room Control**

Room control is a critical area in hotel auditing as it directly affects revenue recognition and occupancy management. The auditor should examine the following aspects when problems arise in room control:

The auditor must verify that a **proper room status system** is maintained, reconciling the front office records with housekeeping reports. Any discrepancy between rooms shown as occupied versus rooms actually occupied indicates a control failure. The auditor should check whether **room rack procedures** are followed — every room must be assigned a clear status (occupied, vacant, out-of-order, under maintenance) and these statuses must be updated in real time.

The auditor should scrutinize the **night audit process**, which is the backbone of hotel room control. This involves verifying that room charges are correctly posted, that no-shows and early departures are properly recorded, and that complimentary rooms are duly authorized by management. The auditor should test whether **walk-in guests, advance bookings, and group bookings** are all routed through a single integrated system to prevent double-occupancy or revenue leakage.

Special attention must be paid to **unauthorized room usage** — the auditor should check logs for rooms occupied without corresponding revenue entries, which may indicate fraud or error. The **key control system** (physical or electronic) sho…

Question 17

Mr. B and his team members in detail checked and evaluated the books of accounts and relevant documents in an example of which audit procedure

Accepted Answer

**Answer: (a)**

Inspection is an audit procedure involving detailed examination and evaluation of books of accounts, records, documents, and tangible assets to verify their existence, authenticity, and accuracy. When Mr. B and his team members in detail checked and evaluated the books of accounts and relevant documents, they were performing inspection. This is distinct from re-performance (redoing controls), recalculation (verifying arithmetic), and observation (watching processes in real-time). As per SA 500, inspection of records and documents provides reliable audit evidence for substantive testing.

Question 18

Statement 1: Audit procedures consist of Risk Assessment Procedures and other procedures. Statement 2: Substantive procedures consist of test of details and analytical procedures.

Accepted Answer

**Answer: (c)**

Both statements are correct. According to **SA 300 (Planning an Audit of Financial Statements)** and **SA 330 (The Auditor's Responses to Assessed Risks)**, audit procedures are broadly categorized into two types: (1) **Risk Assessment Procedures** — performed to obtain an understanding of the entity, its environment, and internal controls under **SA 315**; and (2) **Further Audit Procedures** (the "other procedures") — which include tests of controls and substantive procedures. Statement 1 accurately reflects this classification.

Statement 2 is also correct. **Substantive procedures**, as defined in **SA 330**, are designed to detect material misstatements in transactions, account balances, and disclosures. They comprise two components: (1) **Tests of Details** — examining individual transactions and balances; and (2) **Analytical Procedures** — evaluating financial and non-financial data relationships. Both are integral to substantive audit work.

Question 19

Explain the audit approach you would follow to check the Operating Expenses of a Bank.

Accepted Answer

**Audit Approach for Bank Operating Expenses**

**1. Planning and Understanding Phase** 
The auditor should first understand the nature and composition of operating expenses, which typically include salaries and allowances, premises costs (rent, utilities, maintenance), depreciation, professional fees, IT and technology expenses, and other administrative costs. Review the bank's accounting policies for expense recognition, ensure compliance with AS 16 (Employee Benefits) for employee-related costs, and assess the internal control environment governing expense authorization and approval.

**2. Preliminary Procedures** 
Analyze trends in operating expenses for the period compared to prior years and budget. Identify unusual variations and high-risk areas requiring detailed testing. Review expense account classifications and ensure proper segregation between revenue and capital items. Assess the control objectives: existence, completeness, accuracy, and proper authorization of expenses.

**3. Testing of Controls** 
Test the design and operating effectiveness of key controls over expense processing. Verify that expenses are authorized by appropriate authority levels, supported by adequate documentation (invoices, bills, receipts), and recorded in the correct period. Check that segregation of duties exists between request, authorization, recording, and payment functions. Test the bank's controls over accrual and reversal of expenses.

**4. Substantive Procedures** 
For significant …

Question 20

What are the general requirements of an effective Risk Management System in Banks?

Accepted Answer

An effective Risk Management System in Banks must embody the following general requirements:

**1. Board and Senior Management Oversight** — The Board of Directors must establish an overall risk management framework and define the bank's risk appetite. A Risk Management Committee should be constituted to oversee implementation of risk policies. Senior management must ensure that risk management processes are integrated into the bank's strategic planning and day-to-day operations.

**2. Identification and Measurement of Risks** — The bank must have robust mechanisms to identify, assess, and quantify all material risks including credit risk, market risk, operational risk, and liquidity risk. Risk measurement methodologies must be appropriate to the size and complexity of the bank's operations.

**3. Risk Limits and Controls** — The bank must establish explicit risk limits for each risk category and monitor compliance with these limits on a continuous basis. Appropriate internal control procedures must be put in place to ensure adherence to established policies and procedures.

**4. Independent Risk Management Function** — There must be an independent risk management department or function headed by a Chief Risk Officer (or equivalent) reporting directly to the Board or Audit Committee. This function must be separate from business units to ensure objectivity and avoid conflicts of interest.

**5. Adequate Information Systems and Technology** — The bank must have reliable informa…

Question 21

Audit against rules and orders aims to ensure that the expenditure conforms to the relevant provisions of the Constitution and of the laws and rules made thereunder. These rules, regulations and orders against which regularity audit is conducted fall under various categories. Explain.

Accepted Answer

**Audit against rules and orders** is a form of regularity audit that ensures government expenditure conforms to the relevant provisions of the Constitution, laws enacted by Parliament and State Legislatures, and rules framed thereunder. The rules, regulations, and orders against which such audit is conducted fall into the following categories:

**1. Constitutional Provisions:** These include relevant Articles of the Constitution of India, particularly Article 265 (no tax except by authority of law), Article 266 (Consolidated Fund of India), Article 267 (Contingency Fund), and Articles relating to borrowing and spending authority. The audit verifies that all government expenditure has proper constitutional sanction and is made according to constitutional procedure.

**2. Statutory Provisions:** These are Acts enacted by Parliament and State Legislatures. Examples include the Income Tax Act 1961, Central Goods and Services Tax Act 2017, Companies Act 2013, Central Civil Services (Conduct) Rules, etc. The audit ensures that transactions and expenditure comply with the provisions and requirements of these Acts.

**3. Rules and Regulations Framed Under Acts:** These are detailed rules notified under various Acts by the government to operationalize the provisions. Examples include Income Tax Rules, GST Rules, Financial Rules, Delegation of Powers Rules, and Rules of Business. The audit checks whether expenditure and transactions are made strictly in accordance with these rules.

*…

Question 22

Reserves are a vital source of financing by internal resources. Explain and also discuss about:

Accepted Answer

**Reserves as Internal Source of Financing** refer to accumulated profits and surpluses retained within the business to meet future obligations, finance expansion, and strengthen financial position. Reserves represent self-generated funds that do not require external borrowing, making them a vital component of internal financing.

**Classification of Reserves (as per Schedule III, Companies Act 2013):**

(1) **Capital Reserves:** Created from non-recurring gains outside normal business operations—such as share premium, profit on sale of fixed assets, and revaluation gains. These are generally not available for dividend distribution and have restricted use for internal financing purposes.

(2) **Revenue Reserves:** Generated from normal business profits and available for distribution as dividends or reinvestment:
- **General Reserve:** Created by appropriating profits; provides maximum financial flexibility for any business need
- **Specific Reserves:** Created for designated purposes (Debenture Redemption Reserve, Contingency Reserve, etc.) with restricted utilization

**How Reserves Function as Internal Financing Source:**

When companies retain earnings instead of distributing them entirely as dividends, these retained reserves can be deployed for capital expenditure, working capital expansion, debt repayment, and contingency management without incurring external debt or paying interest.

**Advantages of Reserve-Based Financing:**

(1) **Financial Autonomy:** Reduces depend…

Question 23

Under the Employees Provident Fund Scheme, the employer is required to deduct and remit the employer's contribution to the Fund. Explain.

Accepted Answer

Under the Employees Provident Fund (EPF) Scheme, 1952, the employer has two distinct obligations regarding contributions to the Fund.

**Deduction of Employee's Contribution:** The employer is required to deduct the employee's contribution from the employee's wages. Currently, this stands at 12% of wages (calculated on basic wages plus dearness allowance). This amount is mandatory and must be deducted and credited to the individual employee's EPF account without exception.

**Employer's Contribution Obligation:** In addition, the employer must contribute its own share, which is also 12% of the employee's wages. Importantly, this is the employer's own liability and cannot be recovered or deducted from the employee's salary. The employer must contribute this amount from its own funds.

**Remittance Requirements:** Both the employee's contribution (deducted from wages) and the employer's contribution must be remitted to the EPF authorities (EPFO) within the prescribed due date, typically by the 15th of the following month in which wages are paid. Timely remittance is mandatory.

**Legal Framework:** These obligations stem from the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and the Employees' Provident Funds Scheme, 1952. The scheme applies to all establishments employing 20 or more workers.

**Penalties:** Failure to deduct or remit contributions within the due date attracts penalties and interest under the statute. Arrears must be remitted with interest …

Question 24

Statement 1: As per the Standard on Auditing (SA) 500 "Analytical Procedures", the term "analytical procedures" means the process also comprising such investigation as is necessary of identified financial data and other relevant information or that differ from expected values by a significant amount. Statement II: Analytical procedures also encompasses such investigation as is necessary of identified differences between amounts, ratios and trends for other relevant information or that differ from expected values by a significant amount.

Accepted Answer

**Answer: (b)**

Statement I is incomplete and imprecise. While it mentions investigation of identified financial data that differ from expected values, it fails to specify the core elements of analytical procedures. The definition lacks reference to the key components: **relationships among financial data**, and the specific nature of what is analyzed (amounts, ratios, trends).

Statement II is correct. SA 500 defines analytical procedures as evaluations of financial information made by a study of plausible relationships among financial and non-financial data. Statement II accurately captures this by specifically mentioning **investigation of identified differences between amounts, ratios and trends** that are either inconsistent with other relevant information or differ from expected values by a significant amount. This aligns precisely with SA 500's scope that analytical procedures involve analyzing and investigating such relationships and fluctuations.

Question 25

Mr. A auditor and Mr. B, Finance Manager of XYZ Pvt Ltd are friends. Mr. A prepares the audit report according to the wishes and directions of Mr. B. In this situation which essential quality of the auditor has been compromised:

Accepted Answer

**Answer: (b)**

The essential quality compromised is **Independence**. The scenario demonstrates a clear violation of auditor independence on two fronts: (1) personal relationship between the auditor and the finance manager as friends, and (2) the auditor preparing the audit report according to the wishes and directions of the finance manager instead of forming independent conclusions based on audit evidence. Independence requires the auditor to be free from bias, conflicts of interest, and undue influence from management. Preparing a report to suit management's wishes is a fundamental breach of independence, which is the cornerstone of audit credibility.

Question 26

The term "Drawing Power" is associated with which of the following facilities as sanctioned by any Bank:

Accepted Answer

**Answer: (d)** Drawing Power is associated with **Overdraft Limit**. Drawing power refers to the maximum amount that a customer is permitted to draw (overdraw) from their bank account at any point in time. When a bank sanctifies an overdraft facility, it establishes a drawing power limit based on the borrower's security, creditworthiness, and repayment capacity. The customer can withdraw funds up to this sanctioned limit. While drawing power is commonly used in working capital facilities like cash credit, among the given options, overdraft limit is the most directly associated facility where this term applies.

Question 27

The auditor of Vikram Ltd wants to know from you which of the following methods are analytical procedures: I. Comparison of client and industry data II. Comparison of client data with prior period data III. Comparison of client data with client-determined expected results IV. Comparison of client data with auditor-determined expected results

Accepted Answer

**Answer: (d)**

All four methods are valid analytical procedures under SA 520 (Standards on Auditing - Analytical Procedures). Analytical procedures involve evaluating financial information through the analysis of plausible relationships among financial and non-financial data. Method I compares the client's data with industry benchmarks or averages to identify significant deviations. Method II analyzes trends by comparing current period data with prior year data, helping identify unusual fluctuations. Method III uses client-prepared budgets or forecasts to develop expected results for comparison. Method IV involves the auditor independently calculating expected values based on relationships between account balances and other data, then comparing actual results against these auditor-determined expectations. All four constitute valid forms of analytical procedures that auditors employ to identify unusual items, transactions, or trends requiring further investigation.

Question 28

What was the initial procedure carried on CA Rajesh Matta?

Accepted Answer

**Answer: (b)**

In audit analytical procedures, **Ratio Analysis** is typically the initial procedure applied because it provides a fundamental understanding of the financial relationships and comparative position of the entity. Ratio Analysis examines key financial metrics across periods, offering a broad overview before moving to more specific procedures. This makes it the standard starting point in analytical review procedures under **SA 520 (Analytical Procedures)**, as it helps establish baseline understanding and identify potential risk areas. Trend Analysis, Statistical Modeling, and Random Sampling are typically applied after or alongside initial ratio analysis, not as the first step.

Question 29

Who has the right to retain the audit working papers of the Company in current case?

Accepted Answer

**Answer: (c)**

The auditor has the right to retain the audit working papers of the company. This right is established under **SA 230 (Audit Documentation)** which is the relevant Standard on Auditing in India, and is further supported by **Section 143 of the Companies Act, 2013**.

Audit working papers are the auditor's own documents prepared during the audit engagement to support the audit opinion. They remain the auditor's property and responsibility. The auditor must retain them for a minimum period as prescribed under **CARO 2020** and relevant regulations to substantiate the audit work performed and evidence gathered.

While the Audit Committee and Board of Directors oversee the audit function, they do not have retention rights over the working papers themselves. The retention responsibility vests solely with the **auditor** who is accountable for maintaining the audit trail and evidence of the audit work.

Question 30

When CA Rajesh Matta decided to go in detail checking of Sales, which Audit Procedure he applied to obtain the evidence?

Accepted Answer

**Answer: (a) Test of Transactions**

When CA Rajesh Matta decided to go into detail checking of Sales, he applied the **Test of Transactions** audit procedure. A Test of Transactions involves selecting individual sales transactions and examining the underlying supporting documents and evidence to verify that each transaction was properly authorized, accurately recorded, and correctly classified. This procedure tests the operating effectiveness of controls over sales transactions and provides evidence about the completeness, accuracy, and validity of individual sales records. The auditor reviews transaction details such as sales invoices, delivery notes, customer orders, and cash receipts to ensure the transactions are genuine and properly recorded in the accounting system.

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