Question 1

The persons with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity are:

Accepted Answer

**Answer: (B)**

According to SA 260 (Standards on Auditing 260) – Communication with Those Charged with Governance, "those charged with governance" are persons or organizations (such as a board of directors, management committee, audit committee, or owner in an owner-managed entity) with responsibility for overseeing the **strategic direction** of the entity and **obligations related to the accountability** of the entity. This is the precise definition used in auditing standards. While management executes strategic decisions, the audit committee may be a subset of governance, and the board of directors may represent those charged with governance, the term "those charged with governance" is the correct technical answer encompassing the broader governance structure.

Question 2

Which of following is not a threat to independence of auditor?

Accepted Answer

**Answer: (D)** Peer group threats is not a recognized threat to auditor independence. As per SA 120 (Audit Quality), the specific threats to auditor independence are: (1) Self-interest threats—when the auditor has a financial or other interest conflicting with the audit; (2) Self-review threats—when the auditor evaluates results of previous non-audit services; (3) Advocacy threats—when the auditor acts as an advocate for the client; (4) Familiarity threats—excessive familiarity with the client; and (5) Intimidation threats—intimidation or pressure from the client. Peer group threats do not constitute a distinct threat category in the auditor independence framework.

Question 3

CA Tarini is in process of formulating audit plan for conducting audit of a company engaged in business of dealing in commodity futures. Which of the following is not likely to be an appropriate audit procedure to be included in audit plan for the abovesaid company?

Accepted Answer

**Answer: (B)**

A commodity futures dealer is engaged in trading financial derivatives (commodity futures contracts) on exchanges, not in manufacturing or physical trading of commodities. Therefore, verification of cost of raw material consumed is not an appropriate audit procedure for such an entity.

For a commodity futures dealer:
- **Turnover verification (A)** is essential to verify revenue from trading activities
- **Revenue recognition policies (C)** are critical given the nature of mark-to-market accounting and derivative valuation
- **Broker contract notes (D)** are fundamental supporting documents for all futures transactions

Raw materials are consumed only in manufacturing or trading operations involving physical goods. A commodity futures dealer has no raw material consumption; hence this procedure is wholly inapplicable to the nature of the business.

Question 4

A company has started its manufacturing operations from a newly constructed building. CA Z is statutory auditor of company. Which of following is not likely to be an example of audit documentation?

Accepted Answer

**Answer: (D)**

Audit documentation, as defined in **SA 230**, comprises the record of audit procedures performed, relevant audit evidence obtained, and conclusions reached by the auditor. This includes audit programmes, audit working papers, analyses, confirmations, correspondence, and schedules prepared by the auditor during the audit.

Options (A), (B), and (C) are all examples of audit documentation:

**(A) Email correspondence with CFO** - Audit communications concerning significant matters form part of audit documentation as they record the auditor's investigation and discussions with management.

**(B) Audit programme** - This is core audit documentation, setting out the planned audit procedures and their execution.

**(C) Response to external confirmation requests** - Confirmations obtained directly by the auditor (from banks, customers, suppliers) constitute audit evidence and are integral to audit documentation.

**(D) Structural engineer's report** - This is **NOT** an example of audit documentation. While the auditor may **use** and **rely upon** the structural engineer's report as external evidence to support conclusions (e.g., regarding the building's condition for capitalization purposes), the report itself is **prepared by the structural engineer, not the auditor**. Audit documentation comprises records created or compiled by the auditor as part of the audit process. An expert report created by an external third party, though reviewed and filed for reference …

Question 5

Following are examples of events or conditions that may cast significant doubt on an entity's ability to continue as a going concern. Which of following is an example of operating event/conditions?

Accepted Answer

**Answer: (D)**

Shortages of important supplies is an example of an **operating event/condition** that may cast significant doubt on an entity's ability to continue as a going concern.

Going concern assessment involves evaluating various categories of events and conditions:

**Operating Conditions** relate directly to the entity's ability to conduct its business operations effectively. Shortages of important supplies directly impair operational capability—if the entity cannot obtain necessary raw materials, inventory, or critical supplies, it cannot manufacture goods or deliver services, thereby threatening business continuity.

**Why other options are not operating conditions:**

(A) **Adverse key financial ratios** fall under **financial conditions**—these measure financial performance and solvency (e.g., declining profitability, poor liquidity ratios, high debt-to-equity).

(B) **Inability to pay creditors on due dates** is a **financial condition**—this indicates liquidity stress and failure to meet financial obligations, a solvency issue.

(C) **Indications of withdrawal of financial support by creditors** is a **financial condition**—this relates to the availability of financing and credit support, not operational capacity.

Operating conditions specifically concern production capacity, supply chain, personnel, regulatory compliance, and operational effectiveness. Supply shortages directly threaten the entity's operational viability and ability to continue ordinary bu…

Question 6

Which of following is not an element of audit report in accordance with SA 700?

Accepted Answer

**Answer: (C)**

Audit strategy is not an element of an audit report as per SA 700. SA 700 (Forming an Opinion and Reporting on Financial Statements) specifies that an auditor's report must contain certain mandatory elements: title, addressee (those to whom the report is addressed), introductory paragraph identifying the entity and financial statements, a section describing management's responsibility, a section describing the auditor's responsibility, the basis for opinion, the auditor's opinion, and the auditor's signature with date and address. Audit strategy, while essential for audit planning and execution, is a matter of audit documentation and planning—not an element of the formal audit report itself. Therefore, options (A), (B), and (D) are all mandatory elements of the audit report, making (C) the correct answer.

Question 7

An auditor disclaims opinion when_________________?

Accepted Answer

**Answer: (C)**

Under SA 705 (Modifications to the Auditor's Opinion), an auditor disclaims opinion when unable to obtain sufficient appropriate audit evidence and the possible effects of undetected misstatements could be both material AND pervasive. A disclaimer of opinion is the most severe audit opinion modification and is issued only when scope limitations are so significant that the auditor cannot form an overall conclusion. If the effects are material but not pervasive, a qualified opinion is issued instead.

Question 8

UDIN (Unique Document Identification Number) is required to be stated by practising Chartered Accountant on:

Accepted Answer

**Answer: (D)**

UDIN (Unique Document Identification Number) is a mandatory identification mechanism introduced by ICAI to ensure traceability and accountability of CA services. UDIN is required in two specific cases: (1) on every **audit report issued under the Companies Act, 2013**, and (2) on every **certificate issued by a practising Chartered Accountant**. Option (D) correctly captures both requirements by explicitly restricting audit reports to those issued under the Companies Act 2013 (not all audit reports) while also including certificates. Options (A) and (C) are incomplete as they omit the certificate requirement. Option (B) is too broad as it applies UDIN to all audit reports, whereas the requirement is specifically limited to audit reports issued under the Companies Act 2013.

Question 9

For which of following company, provisions of CARO, 2020 would be applicable?

Accepted Answer

**Answer: (B)**

CARO 2020 (Companies (Auditor's Report) Order 2020) applies to every company under the Companies Act, 2013, except for specific categories. The key exemptions are: (1) One Person Companies (OPC), (2) Small Companies, (3) Nidhi Companies, (4) Insurance Companies, and (5) Non-core investment companies among NBFCs.

Analyzing each option:

(A) Boost Up Training (OPC) Private Limited – Being an OPC, it is explicitly exempted from CARO 2020 compliance.

(B) RCI Bank Limited – As a banking company, it does NOT fall within any exemption category. Banking companies are subject to CARO 2020 requirements.

(C) PST Industries Limited – While an industrial company may be covered by CARO 2020, without confirmation that it is not a small company, the answer cannot be definitively identified.

(D) Moon Insurance Limited – Being an insurance company, it is specifically exempted from CARO 2020 applicability.

Question 10

While reporting under CARO, 2020, it is duty of statutory auditor of company to report:

Accepted Answer

**Answer: (B)**

Under CARO 2020, Clause 17, the statutory auditor is required to report on instances of fraud (whether by or against the company, whether noticed by the auditor or brought to the auditor's notice) involving an amount of **₹1 crore and above** in the Auditor's Report. The reporting requirement is triggered when the fraud amount reaches ₹1 crore in the financial year, either in a single instance or as an aggregate of multiple frauds.

Question 11

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

Accepted Answer

**Examine and Reasons:**

**(i) CORRECT.** Negative assertions in financial statements may indeed be expressed or implied. Per SA (Standards on Auditing), assertions include both positive (e.g., existence, occurrence) and negative (e.g., non-existence, non-occurrence) assertions. Negative assertions arise when items are deliberately absent from the financial statements or when the absence itself carries significance. These can be explicit (stated directly) or implicit (inferred from omissions or context). Auditors must gather sufficient appropriate audit evidence regarding both categories.

**(ii) INCORRECT.** The procedures described constitute **'Inspection'** rather than **'Observation'**. Per SA, the audit procedures are distinct: Inspection involves examining records, documents, and physical assets (which covers examining records in paper/electronic form and physical examination of assets as stated). Observation, conversely, is watching a process or procedure being performed by others (e.g., observing inventory count, cash handling). The statement conflates these two separate audit procedures, making it incorrect.

**(iii) INCORRECT.** Statistical sampling, despite being scientific and free from personal bias, is **not always appropriate** for all circumstances. Its suitability depends on factors including: population size, materiality levels, nature and type of balances, assessed risk levels, cost-benefit analysis, and auditor judgment. Non-statistical (judgmental) samp…

Question 12

After studying description of the company and its nature of operations, which of following statements is most appropriate?

Accepted Answer

**Answer: (B)**

Inherent risk for revenue and profit assertions is likely to be **higher** in this case. The company faces declining student enrolment due to competitive pressure and technological obsolescence, significant financial stress from bank loan obligations, and management pressure to meet financial commitments — all of which create strong incentives for **management to manipulate or overstate revenue and profit figures**. Additionally, high employee turnover (both teaching and administrative staff), replacement of experienced faculty with inexperienced ones, and absence of training programmes weaken the overall control environment, further elevating inherent risk. These factors — financial pressure, management incentives, and a weakened operating environment — are classic indicators of **higher inherent risk** as per **SA 315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment)**.

Question 13

The case scenario describes a situation of leaving of experienced faculties, high employee turnover and absence of training programmes for staff of the company. Such indicators are an example of ____________?

Accepted Answer

**Answer: (B)**

The departure of experienced staff, high employee turnover, and absence of training programmes are classic indicators of an **unsatisfactory control environment**. Under **SA 315 (Identifying and Assessing the Risks of Material Misstatement)**, the control environment encompasses management's attitude, awareness, and actions regarding internal controls — including commitment to competence, human resource policies, and organisational culture. Poor HR practices such as failure to train staff, inability to retain qualified personnel, and high turnover directly reflect weaknesses in the **control environment** component of internal control, not in risk assessment processes, performance reviews, or segregation of duties.

Question 14

The auditor is planning to test company's system for booking revenue in its books of accounts. Identify the correct statement in this regard:

Accepted Answer

**Answer: (B)**

CA Sanjoy is likely to place **lower reliance on controls relating to booking of revenue**. The scenario reveals multiple indicators of a **weak control environment**: high employee turnover among experienced faculty and administrative staff, absence of training programmes, financial pressure on management to meet loan commitments (creating incentive to manipulate revenue), and replacement of experienced staff with inexperienced personnel. Under **SA 315 (Identifying and Assessing the Risks of Material Misstatement)**, these factors collectively indicate that the internal control system over revenue booking is unreliable. This is further corroborated by CA Sanjoy's own decision to increase the area of substantive checking — which is the appropriate auditor response when control reliance is low.

Question 15

The auditor has increased area of 'substantive checking' in the company. It is due to the reason that ________________

Accepted Answer

**Answer: (A)**

When an auditor increases the extent of substantive procedures, the purpose is to **lower detection risk** — the risk that the auditor's procedures fail to detect a material misstatement. Detection risk is the only component of audit risk that the auditor can directly control through the nature, timing, and extent of substantive testing. Inherent risk and control risk exist independently of the audit; the auditor can only respond to them by adjusting detection risk accordingly.

Question 16

The auditor does not want to suffer from probable adverse publicity or loss of professional goodwill. Such a situation is indicative of _____________?

Accepted Answer

**Answer: (B)**

The auditor's concern about **adverse publicity or loss of professional goodwill** is not related to the risk of issuing a wrong audit opinion (audit risk) or failing to detect misstatements (detection risk). Instead, it refers to **auditor's business risk** — the risk that the auditor's association with a client may damage the auditor's own reputation, professional standing, or expose the auditor to litigation or adverse consequences, irrespective of whether the financial statements are misstated. SA 315 and general auditing principles distinguish audit risk from the broader business risks faced by the auditor as a professional.

Question 17

Is the raw material lying in the warehouse of Onetime Limited accounted for correctly in its books of account?

Accepted Answer

**Answer: (A)**

The raw material sent by Mr. AM to Onetime Limited's warehouse for storage purposes **belongs to Mr. AM** — Onetime Limited merely has physical custody of it. **Ownership does not transfer** simply because goods are physically present in a party's premises. As per **AS 2 (Valuation of Inventories)**, inventories should be recognised only when the entity has the risks and rewards of ownership. Since the goods were sent only for temporary storage due to renovation at Mr. AM's warehouse, and billing was to happen the *following* month, title had not yet passed as on 31.03.2023. Therefore, it is **incorrect** for Onetime Limited to include this stock in its inventory. The raw material must appear in **Mr. AM's books** as his inventory.

Question 18

Which exchange rate is considered for accounting of foreign debtors at the year end?

Accepted Answer

**Answer: (B)**

As per **AS 11 (The Effects of Changes in Foreign Exchange Rates)**, monetary items such as trade receivables (debtors) denominated in foreign currency must be reported using the **closing rate**, i.e., the exchange rate prevailing on the **last day of the financial year** (Balance Sheet date). Any resulting exchange difference is recognised in the Profit & Loss account. The rate at the date of invoice is used only at the time of initial recognition of the transaction, not for year-end reporting.

Question 19

Which of the following management assertions is not satisfied with respect to Cars included in the PPE items by the company?

Accepted Answer

**Answer: (D)**

The cars were purchased in the **name of the Directors** of the Company, not in the name of Onetime Limited. This means the company does not have legal ownership or control over these assets. The **Rights and Obligations** assertion requires that the entity holds or controls the rights to assets — since the cars are registered in the directors' names, Onetime Limited cannot assert ownership rights over them. Mr. T verified existence (physical verification done), valuation (invoice amount verified), and completeness (all PPE items recorded) — but Rights and Obligations remains unsatisfied.

Question 20

Which of the following condition is not required to be met for recognizing a provision?

Accepted Answer

**Answer: (A)**

Option (A) describes the definition of a **contingent liability** under **AS 29 – Provisions, Contingent Liabilities and Contingent Assets**, not a condition for recognising a provision.

As per AS 29, a provision is recognised only when all three conditions are met: (B) the entity has a present obligation (legal or constructive) as a result of a past event; (D) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (C) a reliable estimate can be made of the amount of the obligation.

Option (A) — where existence depends on occurrence or non-occurrence of uncertain future events not within the entity's control — is a characteristic of a **contingent liability**, which is disclosed by way of note and is **not recognised** as a provision in the books of accounts.

Question 21

Which of the following conditions is not necessary for recognising dividends in the statement of profit and loss of Onetime Ltd.?

Accepted Answer

**Answer: (D)**

Under **AS 9 (Revenue Recognition)**, dividends are recognised as income when the following conditions are satisfied: (1) the entity's right to receive payment of the dividend is established; (2) it is probable that the economic benefits associated with the dividend will flow to the entity; and (3) the amount of the dividend can be measured reliably. Payment of income tax on dividends received is not a condition for recognition of dividend income in the statement of profit and loss — it is a separate obligation and has no bearing on whether dividend income should be recognised.

CA Inter FM + SM

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