Question 1

As per SA-210, preconditions for an audit do not include which of the following?

Accepted Answer

**Answer: (D)**

SA-210 (Agreeing the Terms of Audit Engagements) specifies the preconditions for an audit engagement. These preconditions are essential conditions that must be satisfied before the auditor accepts an engagement and commences the audit work.

The preconditions for an audit as per SA-210 include: (1) the **acceptability of the financial reporting framework** that will be used to prepare the financial statements, (2) the **auditor's ability to obtain reasonable assurance** that the financial statements will be free from material misstatement, and (3) a common understanding with management regarding their **responsibilities for preparation of financial statements** and other matters such as maintaining internal controls, providing access to records and information, and making available all documents needed for the audit.

Option (D)—**Integrity of key management personnel**—is NOT listed as a precondition for an audit under SA-210. While the auditor must assess the integrity and competence of management as part of risk assessment procedures and acceptance/continuance considerations (and may refuse to proceed or withdraw if integrity concerns arise), the evaluation of management's integrity is NOT a formal precondition outlined in SA-210. Preconditions are structural requirements about financial reporting frameworks and management's explicit acknowledgment of responsibilities; integrity assessment is a separate evaluative process that occurs during planning and ex…

Question 2

An auditor signs a false audit report knowingly. Which of the following fundamental principles of professional ethics is violated in such a case?

Accepted Answer

**Answer: (B)**

When an auditor signs a false audit report knowingly, the fundamental principle of **Integrity** is violated. According to the ICAI Code of Ethics, Integrity requires a member to be straightforward and honest in all professional and business relationships. Integrity implies not merely honesty but fair dealing and truthfulness. A false audit report is a direct violation of honesty and truthfulness, which are core components of integrity. The auditor is deliberately misrepresenting facts and deceiving stakeholders who rely on the audit report, constituting a breach of the integrity principle.

Question 3

Which of the following statements is MOST APPROPRIATE?

Accepted Answer

**Answer: (C)**

SA 300 'Planning an Audit of Financial Statements' establishes that an audit programme is a detailed plan setting out the nature, timing, and extent of planned audit procedures required to implement the overall audit strategy. Unlike audit strategy (which is broader and defines the overall approach), the audit programme is the operational document that translates strategy into specific, executable audit procedures. It provides detailed guidance to the audit team on which procedures to perform, when to perform them, and how extensively to perform them. Option (A) is too broad as it confuses strategy with detailed procedures. Option (B) is incorrect because audit programmes must be reviewed and updated as the audit progresses. Option (D) is incorrect because while prepared for a specific year, prior year programmes serve as useful reference points and can be adapted for subsequent years.

Question 4

A company is engaged in business of obtaining eggs from one day old chicks. Which of the following is NOT an example of an event or condition that may cast significant doubt on the ability of the company to continue as a going concern?

Accepted Answer

**Answer: (D)**

SA 570 'Going Concern' requires auditors to assess whether the company can continue operating for a foreseeable future. Events or conditions that cast significant doubt include catastrophic operational disruptions, regulatory prohibitions, or loss of essential resources.

(A) Mortality of 90% of livestock would paralyze operations since the entire business depends on egg production from living birds. This is a critical operational failure.

(B) A government ban on commercial bird rearing would legally prohibit the company's core business, making continuation impossible regardless of financial position.

(C) Acute scarcity of farm labour throughout the year caused by MGNREGA scheme would render the farm unable to operate effectively, directly threatening business continuity.

(D) A 20% increase in feed costs is an adverse cost factor but remains manageable through price adjustments, efficiency improvements, or margin compression. It represents operational pressure, not a doubt about going concern itself. Many businesses routinely absorb input cost increases without threatening their existence.

Question 5

'Letters of credit' and 'Foreign bills purchased and discounted' are examples of respectively:

Accepted Answer

**Answer: (B)**

**Letters of credit** are **non-funded facilities**. When a bank issues an LC, it provides a contingent liability or guarantee on behalf of its customer (the importer) to a third party (the exporter). The bank does not disburse its own funds at the time of issuance; instead, it commits to pay only when stipulated conditions (presentation of documents) are met. The LC represents a guarantee of payment, not an actual disbursement.

**Foreign bills purchased and discounted** are **funded facilities**. When a bank purchases or discounts a foreign bill of exchange, it immediately pays cash to the seller of the bill (typically at a discounted rate). This is actual disbursement of the bank's own funds. The bank becomes the owner of the bill and waits for maturity to realize its full value.

The distinction is key: funded facilities involve actual credit (money given out), while non-funded facilities involve contingent liabilities (guarantees/commitments).

Question 6

State with reason (in short) whether the following statements are true or false:

Accepted Answer

**Answer:**

**(i) FALSE** – According to SA 530, the level of sampling risk (risk of incorrect acceptance/rejection) directly affects sample size. A lower acceptable sampling risk requires a larger sample size, and vice versa. There is an inverse relationship between acceptable sampling risk and sample size.

**(ii) FALSE** – SA 2400 establishes that audit and review are fundamentally different. An audit provides reasonable assurance (high but not absolute), while a review provides limited assurance. The nature, timing, and extent of procedures differ significantly; audit is a comprehensive engagement, review is limited.

**(iii) TRUE** – Per SA 500, assertions about financial statements include both affirmative assertions (positive statements) and negative assertions (non-existence, absence claims). Negative assertions may be **expressed** (explicitly stated in notes) or **implied** (evident from financial statement presentation). Both forms qualify as audit assertions.

**(iv) FALSE** – SA 300 establishes a specific sequence: the **overall audit strategy** is developed first to address significant matters and establish the general approach. Subsequently, the **audit plan** (detailed plan of procedures) is developed based on this strategy. The strategy precedes and guides the plan, not vice versa.

**(v) FALSE** – An unexplained decrease in Gross Profit Ratio indicates genuine operational issues such as increased input costs, reduced selling prices, or lower sales volume. F…

Question 7

While developing an audit programme, the auditor may conclude that relying on certain internal controls is an effective and efficient way to conduct his audit. Explain stating clearly the points to be kept in mind while developing an audit programme.

Accepted Answer

When developing an audit programme, particularly when relying on internal controls, the auditor must consider several critical points to ensure an effective and efficient audit.

**Understanding the Entity and Business Environment**: The auditor must gain a thorough understanding of the entity's operations, industry characteristics, regulatory environment, accounting policies, and management's objectives. This foundational knowledge helps identify areas of significant risk requiring detailed audit focus.

**Risk Assessment**: The auditor should assess both inherent and control risks. Inherent risk reflects the susceptibility of an assertion to material misstatement absent internal controls. Control risk is the probability that internal controls will not detect or prevent misstatements. A lower assessed control risk (through reliance on controls) justifies reduced substantive procedures, but not elimination of such procedures.

**Thorough Evaluation of Internal Control System**: Before deciding to rely on controls, the auditor must understand and evaluate the operating effectiveness of the internal control system, including the control environment, risk assessment process, control activities, information and communication systems, and monitoring mechanisms. This evaluation determines whether controls are designed and operating effectively to reduce control risk.

**Testing Controls Effectiveness**: If the auditor plans to rely on controls, audit procedures must include tests o…

Question 8

External confirmation procedures frequently are relevant when addressing assertions associated with account balances and their elements but need not be restricted to these items. Apart from confirmations for bank balances and accounts receivables, what are the other situations where external confirmation procedures may provide relevant audit evidence in responding to assessed risks of material misstatement?

Accepted Answer

**External Confirmation Procedures in Other Situations under SA 505**

SA 505 recognizes that while **bank confirmations** and **accounts receivables confirmations** are the most frequently used external confirmation procedures, relevant audit evidence can be obtained through external confirmations in numerous other situations where assertions about account balances or their elements require substantiation from independent third parties.

**Loans and Borrowings**: Confirmations obtained directly from lenders provide relevant evidence regarding outstanding loan balances, interest rates, repayment terms, collateral pledged, debt covenants, and any loan defaults or breaches. This addresses the completeness and accuracy of liabilities recorded.

**Inventory Held by Third Parties**: When inventory is held in warehouses, cold storage facilities, or with consignment agents, confirmations from these custodians provide evidence of the existence and quantity of inventory, supporting the completeness and existence assertions.

**Property, Plant and Equipment**: Items held with third parties for repair, maintenance, or safekeeping can be confirmed directly with those parties to verify existence and assess the appropriateness of valuations or carrying amounts.

**Investments and Securities**: Confirmations from brokers, custodians, or financial institutions regarding securities held in safekeeping, their quantity, cost basis, current market values, and pledging status provide relevant evi…

Question 9

The review of internal controls will enable the auditor to know the areas where control is weak. Explain stating clearly the benefits of evaluation of internal control to the auditor.

Accepted Answer

**Evaluation of Internal Controls: Benefits to the Auditor**

The evaluation of internal controls is a fundamental component of the audit process under SA 315 (Understanding the Entity and Its Environment). The benefits of such evaluation are multifaceted and critical to conducting an effective audit.

**1. Understanding Control Environment and Risk Assessment** The evaluation enables the auditor to comprehensively understand the entity's control environment, governance structure, and management's commitment to integrity and ethical values. This understanding forms the foundation for identifying areas where controls are weak, thereby directing audit attention to high-risk zones requiring greater scrutiny and detailed testing.

**2. Planning and Designing Audit Procedures** A thorough evaluation of internal controls directly assists in planning the overall audit strategy and determining the nature, timing, and extent of audit procedures to be performed. As per SA 330 (The Auditor's Response to Assessed Risks), the auditor designs audit procedures based on the assessed risk of material misstatement. Where controls are strong, the auditor can rely on control testing; where controls are weak, substantive procedures are expanded accordingly.

**3. Audit Efficiency and Optimization** Evaluation of internal controls allows the auditor to reduce substantive testing in areas where controls are operating effectively, thereby improving overall audit efficiency. This risk-based approach …

Question 10

CA K explained to Mr. N the pervasive effects on the financial statements in the auditor's judgement. Which of the following combination best answers as explained by CA K?

Accepted Answer

**Answer: (D)**

As per **SA 705 (Revised) – Modifications to the Opinion in the Independent Auditor's Report**, pervasive effects on the financial statements are those that, in the auditor's judgement: **(i)** Are not confined to specific elements, accounts or items of the financial statements; **(ii)** If so confined, represent or could represent a substantial proportion of the financial statements; or **(iii)** In relation to disclosures, are fundamental to users' understanding of the financial statements. Statement **(iv)** – 'Are confined to specific elements, accounts or items' – is **not** part of the definition and was incorrectly included by CA K, making it the odd one out. Hence, the correct combination is (i), (ii) and (iii).

Question 11

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Illustrate techniques by which fraud can be committed by management overriding controls.

Accepted Answer

**Management override of controls** is a fundamental risk in every audit because management has the unique ability to circumvent controls that would otherwise prevent or detect material misstatements. SA 240 recognizes that even well-designed and operating controls can be overridden. The following are key fraud techniques employed by management:

**Recording unauthorized or fictitious transactions:** Management may record transactions that do not exist, supported by false documentation. This includes creating journal entries in the general ledger with no supporting invoices, bills of lading, or other evidence. Related party transactions can be disguised as arm's length dealings. Transactions may be intentionally recorded in incorrect periods to manipulate reported revenues or expenses. For example, recording December sales in January to inflate year-end figures, then reversing entries in the new year.

**Unauthorized adjustments to financial records:** Management may make unsupported manual adjustments to accounts without proper authorization or documentation. Provisions for doubtful debts, warranty liabilities, or restructuring costs can be manipulated to smooth earnings. Accruals can be altered by management decree rather than through normal procedures. Asset values may be adjusted upward without justification to meet earnings targets.

**Alteration and destruction of evidence:** Original documents such as invoices, cheques, or contracts can be altered after the fact to sup…

Question 12

When expressing 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 [...] in accordance with [the applicable financial reporting framework].' Which is the other phrase which is regarded as being equivalent to the above phrase and could also be used by SAM & Company?

Accepted Answer

**Answer: (C)**

As per **SA 700 (Revised) – Forming an Opinion and Reporting on Financial Statements**, when expressing an unmodified opinion, two phrases are regarded as equivalent:

1. *'...give a true and fair view...'* – used when the financial reporting framework is a fair presentation framework (e.g., Ind AS, IFRS).
2. *'...present fairly, in all material respects...'* – the equivalent phrase also acceptable under SA 700.

Options (A) and (D) use 'true and correct' or 'correct and fair view' which are **not recognised equivalent phrases** under SA 700. Option (B) uses 'present correctly' which is also not the standard equivalent. Only **'present fairly, in all material respects'** is explicitly recognised by SA 700 as equivalent to 'give a true and fair view'.

Question 13

Write the examples of circumstances that indicate the possibility of fraud due to problematic or unusual relationship between the auditor and management.

Accepted Answer

**SA 240 – Fraud Risk Factors: Auditor-Management Relationship**

SA 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements) identifies specific circumstances where problematic or unusual relationships between the auditor and management may indicate fraud risk. These relationships often enable management to manipulate financial statements or override internal controls.

**Examples of Problematic Auditor-Management Relationships:**

**1. Excessive Disputes and Confrontational Attitude** – Management demonstrates a dismissive or hostile attitude toward audit concerns, refuses to acknowledge identified errors, or disputes fundamental accounting principles. The auditor observes management's unwillingness to make necessary corrections or provide adequate explanations for unusual transactions. This suggests management may be concealing fraudulent activity.

**2. Pressure to Expedite the Audit** – Management imposes unreasonable time restrictions to complete the audit, preventing the auditor from conducting adequate audit procedures. Pressure to issue an unmodified opinion despite unresolved audit concerns or identified deficiencies is a significant red flag indicating management's desire to conceal material misstatements.

**3. Restrictions on Audit Access and Scope** – Management imposes limitations on the auditor's access to records, personnel, premises, or specific accounts. Unwillingness to provide necessary documentation, restricting communic…

Question 14

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 per **SA 700 (Revised) – Forming an Opinion and Reporting on Financial Statements**, includes the following elements: (i) a statement that the audit was conducted in accordance with **Standards on Auditing (SAs)**, not Accounting Standards; (ii) a statement on the auditor's independence and fulfillment of other ethical responsibilities; (iii) a reference to the description of the auditor's responsibilities; and (iv) a statement that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.

Option (A) states that the audit was conducted in accordance with **Accounting Standards**, which is **incorrect**. The Basis for Opinion section states that the audit was conducted in accordance with **Standards on Auditing**, not Accounting Standards. Accounting Standards deal with preparation and presentation of financial statements, whereas Standards on Auditing govern the conduct of the audit. Hence, Option (A) is the statement **not** included in the Basis for Opinion section.

Question 15

List the points that an auditor should consider to obtain an understanding of the Company's automated environment.

Accepted Answer

An auditor should consider the following points to obtain an understanding of the company's automated/IT environment:

**Organization and IT Personnel:** The auditor should understand the structure of the IT department, including roles and responsibilities of IT staff, segregation of duties, and the competence of personnel handling critical systems.

**Use of Service Providers:** The auditor must identify whether the company uses external service providers (such as cloud service providers, data centers, or managed service providers) and assess how the company monitors and controls these outsourced functions.

**Hardware and Infrastructure:** Understanding the company's hardware setup, including servers, networks, workstations, databases, and telecommunications infrastructure, to assess their capacity and reliability.

**Systems and Applications in Use:** The auditor should identify all significant systems and applications used for financial reporting and operations, including ERP systems, accounting software, and specialized applications, and understand their functionalities.

**Data Management:** Understanding how data is collected, processed, stored, and archived, including the databases used, data warehouse structures, and data flow across systems.

**Controls Over IT Operations:** Assessment of general IT controls such as access controls, user authentication mechanisms, change management procedures, system documentation, and segregation of duties within the IT environment…

Question 16

A paragraph was included in the Auditor's Report of Health is Wealth Limited that 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 section of the Auditor's Report called?

Accepted Answer

**Answer: (B) Emphasis of Matters.**

As per **SA 706 (Revised) – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report**, an **Emphasis of Matter paragraph** is a paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is **fundamental to users' understanding of the financial statements**. This precisely matches the scenario described, where the audit team included a paragraph referring to the uncertainty relating to the future outcome of a regulatory action, which was appropriately disclosed in the financial statements and was fundamental to users' understanding.

Question 17

Which are specific risks to the company's internal control having IT environment?

Accepted Answer

**IT-specific risks to internal control** refer to risks that arise from the use and reliance on information technology systems in an organization. These risks can significantly compromise the effectiveness of internal controls if not properly managed.

**Key IT-Specific Risks:**

**1. System Access and Authorization Risks** involve unauthorized or inappropriate access to systems and data. These include weak user authentication mechanisms, inadequate password policies, insufficient segregation of duties within IT systems, and lack of timely access revocation when employees leave or change roles. Inadequate role-based access controls can allow users to perform functions beyond their responsibilities.

**2. Data Integrity and Accuracy Risks** arise from the potential for unauthorized or accidental modification, destruction, or corruption of data. Risks include inadequate input validation controls, lack of transaction logging and audit trails, insufficient version control, and inadequate backup and recovery procedures. Data entered into systems may be inaccurate if source documents are not properly validated.

**3. System Availability and Business Continuity Risks** result from system failures, downtime, or unavailability. These include inadequate disaster recovery plans, insufficient backup systems, poor network infrastructure, and lack of redundancy for critical systems. Inadequate business continuity planning can result in significant operational disruptions.

**4. Software a…

Question 18

CA A explained the circumstances to Mr. R in which, when the corresponding figures are presented, auditor's opinion referred to the corresponding figures. Which of these circumstances did he mention to Mr. R?

Accepted Answer

**Answer: (B)**

According to SA 710 'Comparative Information: Corresponding Figures and Comparative Financial Statements', the auditor's opinion refers to the corresponding figures in specific circumstances. One key circumstance is when the auditor's report on the prior period contained a modified opinion (qualified opinion, disclaimer of opinion, or adverse opinion) and the matter giving rise to that modification has been resolved in the current period.

When the underlying issue causing the prior period's modification has been rectified, the auditor can express an unmodified opinion on the corresponding figures and appropriately refer to them in the current year's opinion. This demonstrates that the misstatement or issue has been corrected or resolved.

Option (A) is incorrect because discovering new material misstatements would lead to modification of the current opinion, not simply referring to corresponding figures. Options (C) and (D), while they represent scenarios where corresponding figures exist, do not specifically articulate the condition under which the auditor's opinion refers to them. Option (B) specifically articulates the circumstance where prior period modification issues have been resolved, allowing the auditor's opinion to refer to corresponding figures in the current report.

Question 19

Explain the meaning of Audit Sampling as per the relevant standard on auditing. State the requirements relating to audit sampling, sample design, sample size and selection of items for testing.

Accepted Answer

**Audit Sampling - Meaning and Definition**

As per SA 530 (Audit Sampling), audit sampling is the application of audit procedures to less than 100% of items within a population of audit relevance in such a way that all sampling units have an equal chance of selection, enabling the auditor to obtain and evaluate audit evidence about some characteristic of the population from which the sample is drawn. It is used when the population is large or when 100% testing is not practicable or economical.

**Requirements Relating to Audit Sampling**

SA 530 applies to both statistical and non-statistical sampling approaches. The auditor should determine whether audit sampling is appropriate for the particular audit procedure being performed. When audit sampling is used, the auditor must design the sample, perform audit procedures on the selected items, and evaluate the results to draw conclusions about the entire population. The auditor should consider the relationship between sample size, sampling risk, tolerable error, and expected error in formulating conclusions. The standard requires the auditor to evaluate whether the results of the sample provide a reasonable basis for drawing conclusions about the population.

**Sample Design Requirements**

A properly designed sample should have the following characteristics: (1) **Definition of Population**: The population must be appropriate to the audit objective and should be complete, as an incomplete population will not provide a valid ba…

Question 20

This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range i.e. it is suitable for a homogeneous population having a similar range. Explain about that method.

Accepted Answer

**Simple Random Sampling Method**

Simple random sampling is a method of sample selection wherein each item in the population has an equal and known chance of being selected. This method is particularly appropriate and effective when applied to homogeneous populations consisting of reasonably similar units that fall within a similar range, with minimal variation.

**Definition and Applicability:**
Under SA 530 - Audit Sampling, simple random sampling is recommended for populations that exhibit homogeneity. The population should not contain significant stratification or outliers. When the population consists of similar units within a reasonable range, the statistical principles underlying simple random sampling provide confidence that the sample will be representative of the entire population.

**Methodology:**
In this method, each item in the population is assigned a unique identification number. The auditor then selects the required sample size using tables of random numbers, random number generators, or other mechanical randomization techniques. This systematic approach eliminates subjective judgment from the selection process, ensuring objectivity and reducing selection bias.

**Key Characteristics:**
1. **Equal Probability:** Every item in the population has an identical and known probability of selection.
2. **Objectivity:** The method eliminates auditor bias by relying on randomization.
3. **Statistical Validity:** Results can be projected to the population with known s…

Question 21

Explain the aspects to be considered by an auditor when designing and performing substantive analytical procedures, either alone or in combination with test of details, as substantive procedures in accordance with SA 330.

Accepted Answer

**Substantive analytical procedures** are substantive procedures that involve the auditor's analysis of significant ratios and trends, including the investigation of unusual or unexpected fluctuations and relationships. SA 330 requires auditors to design and perform substantive procedures for all significant account balances and transaction classes, either alone or in combination with tests of details.

**Key Aspects in Designing Substantive Analytical Procedures:**

**1. Assessment of Risk and Materiality** – The auditor must consider the assessed risk of material misstatement at the assertion level. Higher risks require more precise and extensive procedures or combination with tests of details. Performance materiality and clearly defined performance thresholds must guide the design of these procedures to ensure they can detect expected misstatements.

**2. Nature of the Assertion** – Different assertions require different procedures. For example, substantive analytics are highly effective for testing the completeness and accuracy of revenue or expense balances through trend and ratio analysis, but may be less effective for testing existence or cutoff assertions.

**3. Disaggregation and Stratification** – The auditor should consider the level of disaggregation at which the procedure is designed. Performing procedures at a highly aggregated level may mask misstatements. The data should be stratified appropriately (e.g., by location, product, or time period) to increase preci…

Question 22

Discuss with examples the factors that are relevant when determining whether data is reliable for purposes of designing substantive analytical procedures.

Accepted Answer

**Reliability of Data for Substantive Analytical Procedures under SA 520**

SA 520 (Analytical Procedures) requires auditors to assess the reliability of data before using it in substantive analytical procedures. The reliability of data is a critical determinant of the effectiveness of analytical procedures as substantive tests. Several factors must be considered:

**1. Source of Data**
Data obtained from external, independent sources is generally more reliable than data from internal sources. External data, being prepared by third parties without direct interest in the audit outcome, provides greater assurance. For example, a bank confirmation received directly from the bank is highly reliable, whereas cash balance information prepared internally by the finance team is less reliable. Similarly, inventory confirmation from a third-party warehouse operator is more dependable than data prepared by the company's own stores department.

**2. Condition and Verification of Records**
The extent to which underlying records have been subject to independent verification and reconciliation affects reliability. Data that has been reconciled to independent sources and subjected to internal controls carries higher reliability. For instance, if the accounts receivable subsidiary ledger is regularly reconciled with the general ledger and bank confirmations are obtained, the data is more reliable than an unreconciled listing. Similarly, inventory records that are regularly physically counted …

Question 23

Name the assertions for the following audit procedures:

Accepted Answer

The audit assertions under SA 315 (Standards on Auditing) are identification, measurement, presentation, and disclosure attributes that auditors test through various procedures. The following assertions correspond to the given audit procedures:

**(i) Year end inventory verification – Existence Assertion**
Physical verification of inventory at year-end confirms that the inventory recorded in the financial statements actually exists and is present as of the balance sheet date. This directly tests the assertion that assets (inventory) exist and are recorded.

**(ii) Depreciation has been properly charged on all assets – Valuation/Allocation Assertion**
This procedure tests whether depreciation is correctly calculated based on the useful life and cost of assets, and properly allocated to the respective assets over their useful life. This assertion ensures that assets are valued correctly as per applicable accounting standards.

**(iii) The title deeds of the lands disclosed in the Balance Sheet are held in the name of the company – Rights and Obligations Assertion**
Verification of title deeds confirms that the company has legal ownership and rights over the land assets shown in the balance sheet. This assertion ensures that the entity has actual rights to the assets it claims to own, and is not merely holding them in trust or under a lease arrangement.

**(iv) All liabilities are properly recorded in the financial statements – Completeness Assertion**
This procedure ensures tha…

Question 24

PK Pvt Ltd, based in Moradabad, is engaged in export of brassware goods. The company has huge export receivables as on 31st March 2022. It is also analysed from Export Sales account of the company that large number of small shipments were almost despatched daily during month of March 2022. List out few audit procedures you would adopt as an auditor to verify completeness assertion of export trade receivables.

Accepted Answer

The **completeness assertion** for export trade receivables requires verification that all shipments made and revenue earned are completely and accurately recorded in the financial statements. Given PK Pvt Ltd's high volume of small daily shipments in March 2022, the following audit procedures should be adopted:

**1. Examination of Shipping Documents and Dispatch Registers:** Review daily shipping registers, bills of lading, packing lists, and dispatch logs for the entire year, particularly for March 2022. Cross-verify that each documented shipment has a corresponding sales invoice recorded in the Sales Day Book.

**2. Cut-off Testing:** Examine shipments made on or before 31st March 2022 to ensure invoices are recognized in March 2022 and not deferred to April 2022. This is critical given the large volume of small shipments near year-end. Review post-March invoices to identify any goods shipped pre-year-end.

**3. Reconciliation of Shipping Documents with Sales Invoices and Receivables Ledger:** Trace a sample of shipment documents (especially from peak shipping days in March) through to invoices and the Trade Receivables sub-ledger to ensure no shipment remains unrecorded.

**4. Verification of Export/Shipping Bills:** Since the company is engaged in exports, verify that all **Shipping Bills** filed with Customs authorities are reflected in sales records. Obtain export declarations from Directorate General of Foreign Trade (DGFT) or Customs to reconcile with recorded expor…

Question 25

What are the sub categories of the special mention accounts?

Accepted Answer

**Answer: (A)**

Under RBI Prudential Norms, **Special Mention Accounts (SMA)** are classified into three sub-categories based on the nature and duration of stress. **SMA-0** covers accounts that are not overdue but show stress signals (e.g., frequent overdrawals, irregular repayments, return of cheques). **SMA-1** covers accounts where the principal or interest payment is overdue between **31 to 60 days**. **SMA-2** covers accounts where the principal or interest payment is overdue between **61 to 90 days** — after which the account slips into NPA (Sub-Standard category). SMA classification is applicable to loan accounts with outstanding amount of ₹5 crore and above and must be reported to CRILC (Central Repository of Information on Large Credits).

Question 26

XYZ Limited is engaged in the business of Shoes having geographical presence across India. Following details are available from the last audited financial statements of XYZ Limited for the financial year 2020-21:

Paid-up Capital as on 31st March, 2021: Rs. 9.8 Crores
Turnover for Financial Year 2020-21: Rs. 98 Crores
Outstanding Loan from Bank as on 31st March, 2021: Rs. 25 Crores
Liability on Outstanding Debentures as on 31st March, 2021: Rs. 26 Crores

Comment on the applicability of constitution of Audit Committee for XYZ Limited for the financial year 2021-22 based on the above information.

Accepted Answer

**Applicability of Audit Committee for XYZ Limited:**

XYZ Limited is required to constitute an Audit Committee for the financial year 2021-22.

**Legal Framework:**

Section 177(1) of the Companies Act, 2013 prescribes that every listed company and every other non-listed company which satisfies any one of the following criteria shall constitute an Audit Committee:

(a) Paid-up capital of Rs. 10 crores or more; OR
(b) Turnover of Rs. 100 crores or more; OR
(c) Outstanding borrowings of Rs. 50 crores or more

**Analysis of XYZ Limited's Position (as per FY 2020-21 audited statements):**

The following criteria are evaluated:

**Criterion 1 - Paid-up Capital:** Rs. 9.8 Crores — This is **less than Rs. 10 crores**, so this criterion is NOT satisfied.

**Criterion 2 - Turnover:** Rs. 98 Crores — This is **less than Rs. 100 crores**, so this criterion is NOT satisfied.

**Criterion 3 - Outstanding Borrowings:** The total outstanding borrowings comprise:
- Bank Loan: Rs. 25 Crores
- Debenture Liability: Rs. 26 Crores
- **Total: Rs. 51 Crores** — This is **greater than Rs. 50 crores**, so this criterion **IS SATISFIED**.

**Conclusion:**

Since XYZ Limited satisfies the third criterion (outstanding borrowings of Rs. 51 crores exceed the threshold of Rs. 50 crores), it falls under the category of companies required to constitute an Audit Committee. The fact that the paid-up capital and turnover thresholds are not individually met is irrelevant, as any one criterion being satisfied ma…

Question 27

Creation of security of Aquabrass Private Ltd. and Prism Works was in the form of:

Accepted Answer

**Answer: (D)**

For **Aquabrass Pvt Ltd.**, the security involved delivery of goods to Bharat Bank with intention of creating a charge, while legal ownership remained with Aquabrass — this is the definition of **Pledge** (physical possession transferred to creditor/bank, but ownership stays with borrower).

For **Prism Works**, a life insurance policy was transferred in favour of the bank with absolute right over the policy — this is **Assignment** (transfer of rights/interest in an actionable claim or policy to the lender as security).

Hence, the correct combination is Pledge and Assignment.

Question 28

S Private Limited has a paid-up share capital of Rs. 49 Crores and borrowings from bank of Rs. 99 Crores. The audit firm P & Company was appointed as statutory auditors of the Company for one term of five consecutive years. Whether the provision of rotation of auditors applicable to the company? Comment.

Accepted Answer

**Yes, the provision of rotation of auditors is applicable to S Private Limited.**

**Applicability of Rotation Rule:**
Section 139(2) of the Companies Act 2013 prescribes the rotation of auditors. This section provides that no person shall act as an auditor of a company for more than one term of five consecutive financial years. After completion of one term of five consecutive years, the auditor becomes ineligible for reappointment for a period of five years.

**Private Companies – Threshold Criteria:**
For private companies, Section 139(2) makes the rotation rule applicable only if any of the following conditions are satisfied:
(a) Paid-up capital exceeds Rs. 5 crores, OR
(b) Turnover exceeds Rs. 50 crores, OR
(c) Outstanding borrowings exceed Rs. 25 crores

**Analysis:**
S Private Limited satisfies the threshold criteria in two respects:
1. **Paid-up Share Capital:** Rs. 49 Crores, which exceeds the threshold of Rs. 5 crores
2. **Outstanding Borrowings:** Rs. 99 Crores, which far exceeds the threshold of Rs. 25 crores

Since the company meets the criteria on both counts (and in fact, exceeds them significantly), the rotation provision is clearly applicable.

**Implication:**
The audit firm P & Company has been appointed for one term of five consecutive years. Upon completion of this term, they shall not be eligible for reappointment as statutory auditors. Moreover, they will remain ineligible for a further period of five years from the completion of their current term. The…

Question 29

In your opinion is Trustworthy a standard asset or a substandard asset?

Accepted Answer

**Answer: (C)**

Under **RBI Prudential Norms** for income recognition, asset classification and provisioning, a term loan is classified as a **Non-Performing Asset (NPA)** only when the instalment of principal and/or interest remains **overdue for a period of more than 90 days**. In the case of Trustworthy, the term loan instalment is overdue for exactly **90 days** — not *more than* 90 days — at the year-end. Therefore, it has not yet crossed the threshold for NPA classification and remains a **Standard Asset**.

Critically, **security has no bearing** on the classification of an asset as NPA or Standard under RBI Prudential Norms. NPA classification is purely a function of the number of days the asset remains overdue, regardless of whether it is fully secured, partially secured, or unsecured. The fact that the advance is 100% secured against an office building is irrelevant to the classification decision. Option (A) is incorrect because security cannot rescue an otherwise NPA account from being classified as substandard. Option (D) is similarly flawed in suggesting that security is a relevant factor alongside the overdue period. Option (B) is incorrect because it incorrectly treats 90 days as equivalent to 'more than 90 days.'

The bank's classification of Trustworthy as a **Substandard asset** is therefore **incorrect**. It should be reclassified as a **Standard Asset** since the overdue period does not exceed 90 days, irrespective of the security backing the advance.

Question 30

Enumerate the circumstances under which the retiring auditor can be re-appointed.

Accepted Answer

A retiring auditor can be reappointed under the Companies Act, 2013 when the following circumstances are satisfied:

**1. Non-applicability of Disqualifications (Section 141):** The retiring auditor must not fall within any of the disqualifications prescribed under Section 141 of the Companies Act, 2013. These disqualifications include being a director, officer, or employee of the company; being a member of the company; having a business relationship with the company; being indebted to the company; being a partner of the firm engaged as auditor of the company; or having specified family relationships with relevant persons.

**2. Tenure Eligibility (Section 139):** The auditor must satisfy the tenure conditions. An auditor is appointed for a term of five consecutive financial years and may be reappointed for a second consecutive term of five years. However, after completing ten consecutive years of tenure, the auditor cannot be reappointed unless there is a mandatory gap of five financial years before re-engagement.

**3. Consent and Willingness:** The retiring auditor must be willing to accept reappointment and must provide written consent as prescribed.

**4. Proper Procedure and Approval:** The reappointment must be done through a proper resolution passed at the annual general meeting or general meeting of the company. The procedure prescribed under the Companies Act and the company's articles of association must be followed.

**5. No Prior Removal:** The retiring auditor s…

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Write it like this

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2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap