Question 1

Post Inc Case Co. was appointed as the auditor of PS Ltd. at the remuneration of ₹1,40,000. However, costs about ₹1,00,000 for months of continuing recruitment revenue. Post Inc wished to hold his auditor, along with for to the new place. Thus, he resigned from the company and did not perform his responsibilities relating to filing of statements to the company and the register indicating the fee and damages for the default. How much fee may he be punishable under section 140(5) for non-compliance of section 140(2) of the Companies Act, 2013?

Accepted Answer

**Applicable Provision:** Under **Section 140(2) of the Companies Act, 2013**, when an auditor resigns from a company, he/it is required to file a statement in the prescribed form (**Form ADT-3**) with the company and the **Registrar of Companies** within **30 days** from the date of resignation, indicating the reasons and other relevant facts relating to the resignation.

In the given case, Post Inc Case Co. resigned as auditor of PS Ltd. but **failed to file the requisite statement** with the company and the Registrar, thereby committing non-compliance of Section 140(2).

**Penalty for Non-Compliance — Section 140(3) of the Companies Act, 2013:**

Note: The penalty for non-compliance of Section 140(2) is prescribed under **Section 140(3)** (not Section 140(5), which relates to Tribunal-directed removal in case of fraudulent conduct). The question likely refers to Section 140(3) in this context.

As per Section 140(3), the auditor who fails to comply with Section 140(2) shall be liable to a penalty of:

**(i) Initial Penalty:** ₹50,000 **or** an amount equal to the remuneration of the auditor, **whichever is less**.

Remuneration of Post Inc = ₹1,40,000

Comparison: ₹50,000 < ₹1,40,000

**Initial Penalty = ₹50,000**

**(ii) Continuing Default Penalty:** In case of continuing failure, a further penalty of **₹500 per day** for each day after the first during which the failure continues, subject to a **maximum of ₹5,00,000**.

**Maximum Total Penalty = ₹50,000 + ₹5,00,000 = ₹5,…

Question 2

An audit report according to the wishes articulated by M1, if in this situation which essential quality of the audit report is in question?

Accepted Answer

**Answer: (c) Professional Skepticism**

When an auditor prepares an audit report based on the wishes or preferences articulated by M1 (likely management or another party) rather than on audit evidence and independent professional judgment, the essential quality of **Professional Skepticism** is compromised. Professional skepticism requires the auditor to maintain a questioning mind, critically evaluate audit evidence, and exercise independent professional judgment without being unduly influenced by management's wishes, preferences, or pressures. By allowing external wishes to determine the audit report's content, the auditor fails to maintain the critical, objective stance that professional skepticism demands. This leads to reports that reflect preferences rather than factual findings based on audit procedures and evidence.

Question 3

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

Accepted Answer

**Statement (i): TRUE** - There is a desirable inverse relationship between detection risk and the inherent level of assurance required. Per the Audit Risk Model: Audit Risk = Inherent Risk × Control Risk × Detection Risk. As inherent risk increases, detection risk must decrease to maintain constant audit risk, requiring the auditor to perform more extensive substantive procedures and obtain higher assurance. *(Note: Original statement appears textually incomplete; interpretation based on standard audit risk concepts)*

**Statement (ii): FALSE** - Reasonable assurance is not an absolute level of assurance. Per SA 200 (Overall Objectives of the Independent Auditor), reasonable assurance is a high but not absolute level of assurance. Auditors cannot provide absolute assurance due to inherent limitations of audit such as sampling risk, human error, and the potential for management override of controls.

**Statement (iii): FALSE** - Internally generated goodwill cannot be recognized as an asset. Per Ind AS 38 (Intangible Assets) and AS 26, internally generated goodwill must be expensed and cannot be capitalized. Only goodwill arising on the acquisition of a business is recognized as an asset on the acquirer's balance sheet.

**Statement (iv): TRUE** - Sample size is not a valid criterion to distinguish between statistical and non-statistical sampling. The distinguishing criterion is whether statistical/mathematical methods and probability theory are applied to determine sample si…

Question 4

The relationship with the client where they end up being too sympathetic to the client's interests.

Accepted Answer

**Answer: (d)**

The situation described—where an auditor becomes too sympathetic to the client's interests due to prolonged association or relationship—represents a **Familiarization threat** (also called Familiarity threat). This threat arises when an auditor's objectivity is compromised because they have developed close personal or professional relationships with the client over time, causing them to lose sight of their independent stance and become overly sympathetic to the client's position and interests.

Question 5

Chapter 1: Nature, Objective and Scope of Audit

Accepted Answer

**Part (a): Change in Engagement to Lower Assurance — Professional and Ethical Considerations**

When an auditor is requested to change from a higher assurance engagement (such as a statutory audit) to a lower assurance engagement (such as a review or compilation), SA 210 **Agreeing the Terms of Audit Engagements** requires the auditor to carefully evaluate whether such a change is permissible and appropriate.

**Key Professional Considerations:**
The auditor must first determine whether there is a **reasonable justification** for the change. A change should not be made merely because management is dissatisfied with the audit scope or findings. The auditor should assess whether the change would compromise the objectives of the original engagement or violate auditing standards. If a substantial portion of the audit has already been completed, downgrading the engagement may be inappropriate as it creates a gap in audit assurance. The auditor must ensure that the proposed lower assurance engagement would still provide a meaningful level of assurance and comply with applicable accounting and auditing standards.

**Key Ethical Considerations:**
The auditor must maintain **professional independence** and integrity. The change must not be driven by management pressure to avoid adverse findings or to reduce fees inappropriately. The auditor should consider whether accepting the change could be perceived as compromising audit quality or independence. Any change should be documented wi…

Question 6

The person with responsibility for overseeing the strategic direction of the entity and responsibility of the entity are:

Accepted Answer

**Answer: (d)** The **Board of Directors** is the primary body entrusted with the responsibility for overseeing the strategic direction of the entity and the overall accountability/responsibility for the entity's performance and governance. The Board sets corporate strategy, approves major policies, and ensures the entity operates in the best interest of stakeholders. While "those charged with governance" (option b) is auditing terminology encompassing governance oversight, the Board of Directors is the specific corporate body directly responsible for strategic direction. Management (option a) executes the Board's strategies but does not set them. The Audit Committee (option c) oversees financial reporting and internal controls, not overall strategic direction.

Question 7

In establishing the overall audit strategy, the auditor shall understand the reporting objectives of the entity. Explain.

Accepted Answer

**Understanding reporting objectives** is fundamental to establishing an effective overall audit strategy because it defines the scope, nature, and extent of the audit work required.

**What are Reporting Objectives?** Reporting objectives refer to the entity's goals and requirements for financial reporting, including the applicable financial reporting framework (Ind AS, IFRS, or GAAP), regulatory compliance requirements, and the specific format and content of financial statements that the entity is required to prepare.

**Why Understanding Reporting Objectives is Critical:**

**Determining the Financial Reporting Framework:** The auditor must identify which accounting standards apply to the entity (Ind AS for listed companies, Ind AS or Indian GAAP for others). This framework governs how transactions are recorded and reported, directly affecting the audit approach.

**Assessing Materiality and Audit Risk:** Understanding reporting objectives helps the auditor assess quantitative and qualitative materiality thresholds. Different reporting objectives may have different stakeholder expectations—a bank's reporting objectives differ significantly from a manufacturing company's, affecting what the auditor considers material.

**Identifying the Scope and Significant Audit Areas:** Reporting objectives clarify which financial statement lines and disclosures are critical. For instance, if an entity reports to a regulator with specific disclosure requirements, the auditor must extend …

Question 8

Discuss the broad parameters auditor would take into consideration while deciding about using the work performed by the Management's Expert in physical verification.

Accepted Answer

**Applicable Standard: SA 500 – Audit Evidence (Use of Management's Expert)**

When management uses an expert (such as a valuer, actuary, or inventory specialist) in preparing financial statements, the auditor is required to evaluate the adequacy of that expert's work as audit evidence. In the given case, LLI Ltd has engaged a management's expert for physical verification of inventory valued at ₹75 Crores. The auditor must assess whether the work performed by such expert is appropriate and sufficient as audit evidence.

The broad parameters the auditor would consider are as follows:

**(a) Competence, Capabilities, and Objectivity of the Management's Expert**

The auditor shall evaluate whether the management's expert possesses the necessary **competence** (i.e., professional qualifications, expertise, and knowledge relevant to inventory verification), **capabilities** (i.e., ability to perform the work given the nature of inventory — type, location, volume, and complexity), and **objectivity** (i.e., freedom from bias or influence by management). Objectivity is particularly important when the expert is an external party versus an employee of the company. Any relationship between the expert and the entity (financial, personal, or organisational) that may compromise objectivity must be considered.

**(b) Nature, Scope, and Objectives of the Expert's Work**

The auditor must understand the **nature and scope** of the work assigned to the expert. This includes understanding whet…

Question 9

SA 500 - 'Audit Evidence', explains what constitutes audit evidence in an audit of financial statements. Discuss the types and fields of accounting records and other information generally available to the auditor and the nature of financial statements. Explain and discuss the meaning of Audit Evidence in detail.

Accepted Answer

**Audit Evidence** is defined under SA 500 as information used by the auditor in arriving at conclusions on which the audit opinion is based. It comprises both the underlying accounting records and corroborating information available to the auditor.

**Types and Fields of Accounting Records and Other Information Available to Auditors:**

Auditors generally encounter several categories of records: (1) **Books of Original Entry** including journals, cash books, and subsidiary books that record transactions chronologically; (2) **Ledgers** encompassing the general ledger and subsidiary ledgers that classify and summarize transactions; (3) **Financial Statements and Notes** prepared from ledger balances representing management's assertions about economic events; (4) **Supporting Documents** such as invoices, purchase orders, delivery notes, bank statements, and correspondence that provide details of transactions; (5) **Management Representations** in the form of written confirmations, certifications, and verbal statements; (6) **Internal Information** including internal reports, memos, management meeting minutes, and performance data; (7) **External Information** such as bank confirmations, supplier statements, customer replies, and confirmations from third parties; and (8) **Analytical Information** comprising financial ratios, trends, and statistical comparisons.

**Nature of Financial Statements:**

Financial statements represent a structured financial representation of econom…

Question 10

Risk of material misstatement refers to the risk that the financial statements are materially misstated prior to an audit. Discuss the levels at which this risk exists.

Accepted Answer

**Risk of Material Misstatement (RMM)** is the risk that financial statements contain misstatements that are material, either individually or in aggregate. This risk exists and must be assessed at two distinct levels as per SA 315 (Standards on Auditing 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment).

**1. Financial Statement Level (Entity Level)**

At this level, RMM refers to the pervasive risks affecting the financial statements as a whole or multiple assertions across several account balances or classes of transactions. These are entity-wide risks that may not be limited to specific accounts or transactions. Examples include management override of controls, weak corporate governance, inadequate accounting policies, fraud involving senior management, or systemic control weaknesses. The auditor must assess inherent risk and control risk at the financial statement level to determine whether there are circumstances suggesting a higher susceptibility to material misstatement affecting the entity generally. These entity-level risks often require overall responses such as assigning more experienced audit personnel, providing greater supervision, or exercising increased professional skepticism throughout the audit.

**2. Assertion Level (Account/Transaction Level)**

At this level, RMM relates to specific assertions in account balances or classes of transactions. The auditor assesses RMM for each significant…

Question 11

Keeping in view description regarding full payment of item loan on April 23 taken from a bank in April 2022 on satisfaction of charge, which of the following is correct?

Accepted Answer

**Answer: (B)**

The disclosure of pledged assets and their repayment with satisfaction of charge is **required** under Ind-AS standards, not discretionary.

**Ind-AS 7 (Statement of Cash Flows)** mandates disclosure of the nature and extent of security for cash flows from financing activities. **Ind-AS 1 (Presentation of Financial Statements)** requires disclosure of restrictions on assets, including those pledged as security.

Even though the term loan was repaid on April 23, 2022, the fact that a significant asset (manufacturing facility and land) was pledged as security and subsequently released is a material transaction. Disclosure of the pledged assets, the amount of loan secured against them, and the repayment with satisfaction of charge provides transparency regarding:

• The company's financing arrangements during the period
• Restrictions that existed on assets during the financial year
• The cash outflow for loan repayment
• Changes in the company's financial position and obligations

This disclosure is **mandatory** in accordance with Ind-AS requirements and should be made in the notes to the financial statements, not as management discretion (ruling out option A). Option (D) is incorrect because repayment does not eliminate disclosure obligations—the transaction remains significant and material for financial statement users.

Question 12

Fraudulent financial reporting often involves management override of controls that otherwise may operate to prevent or detect fraud effectively. Illustrate the entire techniques by which Management overrides controls.

Accepted Answer

**Management Override of Controls: Definition and Techniques**

Management override of controls refers to the deliberate circumvention of established internal controls by those in positions of authority, particularly management. Unlike other frauds that depend on weaknesses in control design, management override can occur even when controls are properly designed and operating effectively, because management possesses the authority and access to bypass or disable controls.

**Key Techniques of Management Override:**

**1. Recording Unauthorized or Fictitious Journal Entries**
Management may record improper journal entries, particularly at period-end, without proper authorization or supporting documentation. This includes making entries that bypass the normal transaction cycle, creating fictitious transactions, or recording entries in subsidiary ledgers that are not reflected in the general ledger. Such entries often lack adequate supporting documentation or approval trails.

**2. Modifying Accounting Records and Supporting Documentation**
Management can alter transaction amounts, dates, or descriptions in accounting records and supporting documents. This includes changing invoice amounts, falsifying delivery documents, ante-dating or back-dating documents, and manipulating reconciliations. Since management often has unrestricted access to accounting systems, they can modify records without leaving audit trails.

**3. Misrepresenting or Deliberately Omitting Events and Transact…

Question 13

The company's short-term borrowing has increased during the year 2022-23 as compared to last year. One of the following assertions is most relevant to verification of short-term borrowing which one you think is correct?

Accepted Answer

**Answer: (B)**

When short-term borrowing has **increased** during the accounting year compared to the prior year, the most relevant assertion is **Occurrence**. This assertion verifies that the transactions and events recorded (i.e., the borrowing transactions that caused the increase) have actually occurred and pertain to the entity during the period, as per SA 500 Audit Evidence.

The increase in borrowing balance necessarily implies new borrowing transactions were executed during the year. The auditor must verify that these underlying transactions actually took place—that the company genuinely borrowed the increased amounts. Occurrence directly addresses this concern by confirming that borrowing events recorded in the financial statements are genuine transactions of the entity.

Question 14

The team wants to ensure that revenues of company are not overstated. Which of the following is an audit step in this regard?

Accepted Answer

**Answer: (B)**

Testing of sales invoices and their reconciliation with revenue stated in the statement of profit & loss is the most appropriate audit step to ensure revenues are not overstated. This substantive procedure directly compares recorded revenues in the P&L statement with supporting documentation (sales invoices), verifying that only legitimate sales transactions are recognized at correct amounts. By reconciling invoices to the revenue figure, the auditor detects any fictitious, duplicate, or overstated sales entries.

Option (A) is less direct—customer confirmations primarily verify the existence and accuracy of receivables balances rather than revenues in aggregate. Option (C), reviewing post year-end credit notes, addresses returns and allowances that may indicate overstatement, but this is a supplementary procedure for cutoff and completeness assertions. Option (D), debit notes issued post year-end, relate to additional charges and do not directly address revenue overstatement.

Question 15

Write the circumstances that indicate the possibility of fraud to be problematic or unusual.

Accepted Answer

According to **SA 240 (Revised): The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements**, fraud risk factors that indicate problematic or unusual circumstances can be broadly categorized as follows:

**Incentive/Pressure Circumstances:** Management may face pressures such as financial instability or declining profitability that creates incentive to commit fraud. Compensation arrangements tied to achieving financial targets, significant personal financial difficulties of management, and pressure to meet debt covenants or loan agreement requirements are problematic indicators. The organization's declining market share or going concern issues intensify the motivation for fraudulent reporting.

**Opportunity-Related Circumstances:** Weak control environment and inadequate internal controls create opportunity for fraud. These include lack of segregation of duties, weak management oversight of financial reporting, inadequate documentary evidence for transactions, absence of IT access controls, and complex organizational or transactional structures. Lack of proper authorization procedures and insufficient asset safeguarding policies are significant red flags.

**Attitude/Rationalization Indicators:** Disregard for the control environment and financial reporting requirements by those in authority is highly problematic. Frequent disputes with auditors or tax authorities, hostile management attitude, history of violations of laws or regulations, and manag…

Question 16

As regards item's attendance at physical inventory count process of company's inventories in accordance with SA 501 is concerned, which of following is a relevant procedure?

Accepted Answer

**Answer: (A)**

According to SA 501 (Audit Evidence - Specific Considerations for Selected Items), when inventory is material to the financial statements, the auditor shall attend the physical inventory count (unless impracticable) and obtain audit evidence regarding existence and condition by performing three key procedures: (i) observing the performance and supervision of the physical count, (ii) **inspecting the inventory**, and (iii) performing test counts.

(A) Inspection of inventories is directly prescribed in SA 501.12 as a mandatory procedure to assess the existence and condition of inventory. (B) Checking the appropriateness of valuation methods is evaluated separately as part of the auditor's assessment of accounting policies, not during the physical count attendance itself. (C) While evaluating management's instructions is relevant (per SA 501.13), it is a supporting procedure undertaken while observing the count process, not a primary procedure. (D) Performing test counts (also relevant per SA 501.12) is another equally valid procedure alongside inspection.

Question 17

When a business operates in a more automated environment, we are likely to see several business functions and activities happening within the systems. List the business functions and activities happening within the systems.

Accepted Answer

In an automated environment, the following **business functions and activities** occur within IT systems:

**Financial Transaction Processing:**
- **Order-to-Cash Cycle**: Order creation, validation, picking, packing, shipping, and invoice generation. Automatic trigger of transactions based on predefined rules (e.g., invoicing upon delivery confirmation).
- **Purchase-to-Pay Cycle**: Purchase requisition creation, purchase order generation, goods receipt, invoice matching, and payment processing.
- **Accounts Receivable**: Recording customer invoices, tracking receivables aging, automatic dunning for overdue amounts, cash receipt matching.
- **Accounts Payable**: Recording supplier invoices, managing payment schedules, discount tracking, accrual generation.

**Operational Processes:**
- **Inventory Management**: Stock movement tracking, stock valuation (FIFO, LIFO, weighted average), automatic reorder point triggers, obsolescence identification.
- **Payroll Processing**: Salary calculations, statutory deductions (TDS, EPF, ESI), allowances and deductions application, salary disbursement, tax compliance reporting.
- **Fixed Asset Management**: Asset capitalization, depreciation calculation, asset tracking, disposal/retirement processing.

**Recording and Reconciliation:**
- **General Ledger**: Automatic posting of journal entries, inter-company transactions, consolidation adjustments, balance checking.
- **Bank Reconciliation**: Automatic matching of bank statements with cash …

Question 18

The auditor should have understanding of the Company's automated environment.

Accepted Answer

An auditor must develop a comprehensive understanding of the Company's automated environment, as IT systems fundamentally impact how transactions are processed, recorded, and reported in financial statements.

**Why Understanding is Essential:** SA 315 (Identifying and Assessing the Risks of Material Misstatement) requires auditors to understand the entity and its environment, including IT systems. Understanding the automated environment enables the auditor to: (a) identify relevant risks of material misstatement arising from IT systems; (b) design appropriate audit responses under SA 330; (c) assess whether IT controls operate effectively; (d) determine if specialized IT audit expertise is required; and (e) select suitable audit procedures.

**Key Aspects to Understand:** The auditor should understand: (1) **System Architecture** — hardware, software, network infrastructure, and how applications integrate; (2) **Transaction Flow** — how transactions move from initiation through processing to recording in the general ledger; (3) **IT Controls** — both application controls (validations, authorization logic embedded in systems) and general IT controls (access management, change management, backup procedures); (4) **User Access** — authentication methods, authorization levels, and segregation of duties enforced by the system; (5) **Change Management** — procedures for authorizing, testing, and implementing system changes; (6) **Data Integrity** — backup protocols, disaster recov…

Question 19

The auditor is required to project misstatement for the population to obtain a broad view of the scale of misstatement. Explain in detail.

Accepted Answer

**Introduction to Audit Sampling and Projection** Audit sampling involves examining a subset of the population to draw conclusions about the entire population. SA 530 'Audit Sampling' requires auditors to project misstatements identified in the sample to the population to assess the overall impact of misstatements on the financial statements and determine whether the results support the audit conclusion.

**Nature and Purpose of Misstatement Projection** When an auditor selects a sample for testing, any misstatements found are not representative of only those selected items but likely indicate misstatements exist in the untested population as well. Projection of misstatement provides a broad view of the scale of misstatement across the entire population tested. This is essential because individual misstatements may be immaterial, but the projected amount could be material and affect the auditor's opinion on the financial statements.

**Methods of Projecting Misstatements** According to SA 530, there are two primary approaches: (1) **Statistical Sampling** - using statistical formulas to calculate projected misstatement with quantifiable precision and confidence levels. Projected misstatement is calculated as: (Misstatement found in sample / Book value of sample) × Book value of population. (2) **Non-Statistical Sampling** - using professional judgment to project the misstatement based on the pattern of errors found. Even in non-statistical sampling, auditors must still projec…

Question 20

What is auditing trying to achieve by carrying out those comparisons?

Accepted Answer

**Objective of Comparative Analysis (Analytical Procedures) under SA 520**

When an auditor compares the current year's financial statements of Powers Limited (F.Y. 2022-2023) with previous years, the auditor is performing **Analytical Procedures** as defined under **SA 520 – Analytical Procedures** issued by the Institute of Chartered Accountants of India (ICAI).

**Purpose and Objectives the Auditor is Trying to Achieve:**

**1. Risk Assessment (SA 315):** The auditor uses analytical procedures during the planning stage to obtain an understanding of the entity and to identify areas of potential risk. Unusual fluctuations or unexpected relationships between current and prior year figures signal areas where misstatements may exist, directing audit attention appropriately.

**2. Obtaining Substantive Audit Evidence:** Analytical procedures are used as substantive procedures to detect material misstatements in account balances or classes of transactions. By comparing current figures with prior year figures, the auditor evaluates whether recorded amounts appear reasonable.

**3. Identifying Unusual Trends or Fluctuations:** Comparisons help the auditor identify significant changes in financial data — for example, a sudden increase in expenses or a sharp drop in gross profit ratio — which may indicate errors, fraud, or unusual business events that require further investigation.

**4. Plausibility Assessment:** The auditor assesses whether figures in the financial statements are *…

Question 21

While designing and performing substantive analytical procedures, either alone or in combination with other procedures, may form the auditor's substantive procedures in accordance with SA 330. The auditor shall determine the suitability of particular substantive analytical procedures for given assertions, taking account of the assessed risk of material misstatement and tests of details, if any, for broad assertions. Discuss.

Accepted Answer

**Substantive Analytical Procedures under SA 330**

**Nature and Definition**: Substantive analytical procedures are audit procedures designed to detect material misstatements at the assertion level. These procedures involve analysis of plausible relationships among both financial and non-financial data. They can be performed either as standalone substantive procedures or in combination with tests of details to form a complete substantive approach.

**Use as Substantive Procedures Under SA 330**: SA 330 'The Auditor's Responses to Assessed Risks' permits the auditor to design substantive procedures as either analytical procedures or tests of details, or a combination of both. Substantive analytical procedures may, in appropriate circumstances, form the auditor's substantive procedures without necessarily performing detailed tests. This provides flexibility in audit design while maintaining effectiveness in detecting material misstatements.

**Factors in Determining Suitability**: The auditor shall consider several key factors when determining whether a substantive analytical procedure is suitable for a given assertion: (1) The type of assertion being addressed—whether it relates to completeness, occurrence, accuracy, valuation, or rights and obligations; (2) The nature of the account balance or class of transaction; (3) The availability and reliability of the data required for the procedure; (4) The assessed risk of material misstatement at the assertion level; (5) The inhere…

Question 22

Examination – In depth of the payment made is omitted. The Audit Assistant of M/s Ltd Co. would verify the following documents of UMP Fraud is sent in case of payment: (i) The invoice and statement of account received from the supplier. (ii) The cheque and the relevant record showing that the goods were received. (iii) The Goods Received Note and Inspection Certificate showing that the goods on receipt were checked and inspected. (iv) The copy of the original order and authority showing that the goods in fact were ordered by authority when was compared to the bill.

Accepted Answer

**Payment Verification: Audit Documentation and Procedures**

**Purpose of Payment Verification**
An audit assistant's verification of payment documents serves to ensure that transactions are genuine, authorized, and properly recorded. This is critical in detecting and preventing fraud, particularly unauthorized or fictitious payments. The verification process follows a systematic matching procedure to establish an audit trail.

**The Four-Point Verification Framework**

**1. Invoice and Statement of Account**
The invoice from the supplier serves as the primary documentary evidence of the liability incurred. The audit assistant must verify: (a) the authenticity of the supplier through cross-reference with authorized vendor lists; (b) the accuracy of quantities, rates, and amounts; (c) the matching of invoice date with the transaction date in records; and (d) the receipt of this document before payment authorization. The statement of account provides a reconciliation of outstanding balances and confirms the supplier's version of pending dues.

**2. Cheque and Goods Receipt Record**
The cheque stub or cancelled cheque provides evidence that payment was actually made through proper banking channels. The audit assistant verifies: (a) cheque number, date, payee name, and amount; (b) authorization signatures and bank clearing details; and (c) the corresponding entry in cash records. The goods receipt record (often the gate pass or warehouse entry) proves that materials/services wer…

Question 23

State with reasons the accuracy of the following: 1. Hire purchase agreement is in writing and is signed by all parties. 2. Hire purchase agreement specifies clearly: (i) the purchase price of the goods to which the agreement relates; (ii) the cash price of the goods, that is to say, the price at which the goods may be purchased by the lender for cash; (iii) the rate of interest which is to be charged on hire-purchase price from the point where it is payable; and (iv) the number of instalments by which the hire-purchase price is to be paid, the amount of each of those instalments, and the date, or the mode of determination of the date, on which each of those instalments and the place where it is payable; and (v) to attach the agreement relates, in a manner sufficient to identify them. 3. A…

Accepted Answer

**Statement 1: Hire Purchase Agreement in Writing and Signed by All Parties**

This statement is **ACCURATE**. A hire-purchase agreement must be in writing and signed by both the owner and the hirer to be valid and enforceable. This is a fundamental legal requirement under the Hire-Purchase Act, 1972. The written and signed document serves as evidence of the terms agreed upon and protects the rights and obligations of both parties. It ensures clarity, prevents disputes, and provides a legal basis for enforcement of the contract.

**Statement 2: Essential Terms in Hire Purchase Agreement**

This statement is **ACCURATE**. Section 10 of the Hire-Purchase Act, 1972 mandates that a hire-purchase agreement must clearly specify: (i) the purchase price; (ii) the cash price of the goods; (iii) the rate of interest on the hire-purchase price; (iv) the number, amount, and dates of instalments; and (v) identification of the goods. These are mandatory statutory disclosures. The clear specification of these terms is essential to protect the hirer from unconscionable terms and to ensure transparency. The agreement is void if any of these particulars are missing or unclear.

**Statement 3: Scope of Cut-off Procedures to Sales, Purchase, and Inventory**

This statement is **SUBSTANTIALLY ACCURATE but requires qualification**. While cut-off procedures are most critically and extensively applied to sales, purchase, and inventory transactions due to their high frequency and materiality, the pri…

Question 24

As an auditor, how will you verify the receipt of dividends from a company along with the purchase transaction in the case of an entity.

Accepted Answer

**Dividend Verification as part of Audit Procedures**

**1. Understanding the Transaction Context**
Dividends are income arising from investments in shares or securities. When an entity purchases shares from another entity and subsequently receives dividends, the auditor must verify both the investment's validity and the authenticity of dividend receipts. This requires tracing the investment purchase to dividend receipt to ensure the entire transaction cycle is genuine and properly recorded.

**2. Initial Verification of Dividend Entitlement**
The auditor should first verify that the entity holds valid share certificates or has evidence of ownership in the company declaring dividends. This involves obtaining and examining: share certificates with serial numbers, DEMAT account statements, or share ledger entries. Cross-reference these holdings with the list of dividends received to confirm that dividends were only received on shares actually held by the entity. Reconcile the number of shares held with the dividend advice received to ensure the dividend amount calculated is correct.

**3. Verification of Dividend Receipt**
Obtain dividend advices or intimations directly from the dividend-paying company or through the entity's bank. These documents should show the company name, dividend rate per share, total shares held, gross dividend amount, tax deductions (if any), and net amount credited. Verify the calculations on the dividend advice independently. Trace the dividend amount…

Question 25

A prior appointment of a limited company has not segregated transactions of one period from the other in the invoicing period. As an Auditor, what the correct procedure to be followed by it?

Accepted Answer

**Audit Procedures for Transaction Segregation Deficiency:**

When transactions of different periods have not been properly segregated in the invoicing records, the auditor must follow systematic cutoff procedures to ensure accurate period-end reporting:

**1. Identify and Document the Extent of Mis-segregation** Review all invoices, delivery notes, and receipts issued around the period-end cutoff date to determine the scope and nature of transactions incorrectly classified. Obtain a detailed list of affected transactions from management.

**2. Examine Supporting Documentation** Obtain and examine: (a) invoices and delivery notes to verify when goods were actually delivered; (b) Goods Receipt Notes (GRNs) or equivalent receiving documents; (c) payment records and bank statements; (d) credit/debit notes issued around cutoff date. The critical test is comparing the date of invoice issuance with the actual date of delivery or service provision.

**3. Perform Cutoff Testing** Review transactions recorded just before and after the balance sheet date to determine whether they relate to the current or subsequent period. This is essential because **revenue cutoff** requires sales to be recognized in the period goods/services are delivered, not when invoices are issued.

**4. Reconcile with Counterparties** Where practicable, confirm the transaction dates with customers/suppliers through correspondence or review of their accounting records, particularly for material transactions.

**5…

Question 26

Appointment of Subsequent Auditor of a Government Company: As per Section 139(1) of the Companies Act, 2013, in the case of a Government company or any company wholly owned or controlled, directly or indirectly, by the Central Government, State Government, or any other body corporate owned or controlled by the Central Government or State Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, on behalf of a financial year, appoint an auditor duly qualified to be appointed as an auditor of a company. The auditor shall continue to hold office till the conclusion of the financial year, who shall hold office till the conclusion of the annual general meeting.

Accepted Answer

**Appointment of Subsequent Auditor in Government Companies**

Under **Section 139(1) of the Companies Act, 2013**, the Comptroller and Auditor-General (CAG) appoints the auditor of a Government company (or a company wholly owned or controlled by the Central Government, State Government, or bodies corporate owned or controlled by them) on behalf of each financial year. The auditor holds office until the conclusion of the annual general meeting.

**(a) Tenure Provisions under Audit and Auditors Rules, 2014:**

The Audit and Auditors Rules, 2014 provide that the auditor appointed by the CAG shall hold office for a period of **three consecutive financial years** unless removed earlier. The auditor cannot be removed before the expiry of this three-year tenure except on grounds specified in **Section 140 of the Companies Act, 2013**. After the initial three-year term, if there is **deferment of removal** at a subsequent annual general meeting, the auditor may continue in office beyond the stipulated period. The auditor thereafter holds office until the conclusion of every sixth annual general meeting, meaning reappointment or continuation follows a cyclical pattern at AGMs.

**(b) Deferment Clause for Auditor Removal:**

The **deferment clause** under Section 139(1) relates to the **postponement or deferment of auditor removal** from office. This provision allows that even when an AGM passes a resolution to remove the auditor before the expiry of the tenure, the actual removal doe…

Question 27

The auditor has tested 20 sample wage sheets in different sections of the company and finds that one wage sheet has not been signed by a authorized officer of the company. It represents:

Accepted Answer

**Answer: (B)**

The unsigned wage sheet represents a **Deviation**. A deviation is a departure from a prescribed control procedure. In control testing, when the auditor finds that an internal control (in this case, authorization/signature of wage sheets by an authorized officer) has not operated as designed, it constitutes a deviation. The unsigned wage sheet is a failure of the control to function as intended. This is distinct from a misstatement, which relates to errors in amounts within substantive testing. The tolerable rate of deviation and actual rate of deviation are related concepts—the tolerable rate (TRD) is the maximum deviation rate the auditor will accept, while the actual rate (ARD) is calculated from sample results (1/20 = 5% here). The single occurrence of an unsigned sheet is an instance of deviation, contributing to the actual deviation rate.

Question 28

As per Section 143(3) of the Companies Act, 2013, the auditor's report shall also include such other matters as may be prescribed by Rule 11 of the Companies (Audit and Auditors) Regulations, 2014. What other matters are required to be included in the report?

Accepted Answer

As per Section 143(3) of the Companies Act, 2013, the auditor's report shall include such other matters as may be prescribed by Rule 11 of the Companies (Audit and Auditors) Regulations, 2014. The following are the **other matters** required to be included in the auditor's report:

**Key Audit Matters (KAM):** As per SA 701 (Standards on Auditing 701), the auditor shall identify and report those key audit matters determined to be of most significance during the audit. These are mandatorily required for companies with turnover exceeding ₹250 crore.

**Emphasis of Matter and Other Matters Paragraphs:** As per SA 706, the auditor may include paragraphs that draw attention to matters appropriately presented or disclosed in the financial statements that are of significance to users, or matters relevant to users' understanding of the audit conducted.

**Fraud and Illegal Acts:** As per SA 240, the auditor shall report any detected instances of fraud or illegal acts that are material to the financial statements or have affected the audit process.

**Related Party Transactions:** The auditor's report shall include a statement on the nature, extent, and assessment of related party transactions to ensure proper disclosure in accordance with applicable accounting standards.

**Compliance with Secretarial Standards:** A clear statement that the company has complied or not complied with the Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI), as required u…

Question 29

As per the Companies (Audit and Auditors) Rules, 2014, following matters are required to be included in auditor's report relating to Nidhi Company, besides the other matters to be included in auditor's report, as the case may be:

Accepted Answer

**Auditor's Report — Additional Matters for Nidhi Company under Companies (Audit and Auditors) Rules, 2014**

Rule 11 of the Companies (Audit and Auditors) Rules, 2014 (as amended by the Companies (Audit and Auditors) Amendment Rules, 2022) prescribes certain matters that the auditor must include in his report. These are applicable to all companies, including **Nidhi Companies**, besides any other specific reporting requirements. The four matters as given in the question are explained below:

**(a) Disclosure of Impact of Pending Litigations**

The auditor is required to state in his report whether the company has disclosed the **impact, if any, of pending litigations** on its financial position in its financial statements. This requirement flows from the principle under **AS 29 — Provisions, Contingent Liabilities and Contingent Assets**, which requires appropriate disclosure of contingent liabilities arising from pending legal cases. The auditor must verify whether all material litigation and their probable financial impact have been adequately disclosed in the notes to accounts. If the company has not disclosed such impact despite material pending litigation, the auditor should qualify his report accordingly.

**(b) Delay in Transfer to Investor Education and Protection Fund (IEPF)**

The auditor is required to report whether there has been any **delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund (IEPF)** by the company…

Question 30

Which method of selecting samples for verification of trade receivables has been planned by auditor?

Accepted Answer

**Answer: (D)**

For verification of trade receivables, **stratified sampling** is the most appropriate method. The population of trade receivables is heterogeneous in nature, consisting of items varying significantly in size, amount, and age (as indicated by the mention of aging schedules). Stratified sampling divides the population into homogeneous subgroups or strata based on relevant characteristics—such as receivable size (large vs. small), aging category (current, 30 days overdue, 60+ days overdue), or customer type—and samples are drawn proportionately or disproportionately from each stratum. This approach ensures adequate coverage of material items and provides more precise audit evidence. Simple random sampling may miss large items by chance; systematic sampling risks periodic bias; block sampling lacks representation across the full period. Stratified sampling aligns with the auditor's objective of testing the arithmetical accuracy of aging schedules and verifying the completeness and valuation of receivables across all risk categories.

CA Inter FM + SM

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Write it like this

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2Examiner-rewarded phrases

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Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap