Question 1

Attempt any five questions from the remaining six questions.

Accepted Answer

**Part (a): Statements and Guidance Notes of ICAI—Mandatory or Recommendatory?**

The **Standards on Auditing (SA)** issued by ICAI are **mandatory** in nature. All auditors engaged in audit of financial statements are required to comply with SAs as per the Chartered Accountants Act, 1949 and ICAI regulations. Non-compliance with these standards constitutes a violation of professional standards and ethical requirements.

Conversely, **Guidance Notes** issued by ICAI are **recommendatory** in nature. While they provide best practices and practical guidance for auditors, they are not binding. However, auditors are expected to consider them seriously and apply them where relevant, as they represent the considered views of the profession. Deviation from Guidance Notes should be justified and documented.

The distinction is critical: Standards are prescriptive and mandatory; Guidance Notes are persuasive and advisory.

**Part (b): Essential Points While Examining a Voucher**

While examining vouchers as supporting evidence for transactions, an auditor must ensure:

**Authenticity and Originality**: Verify that the voucher is original and not a copy or forged document. Check for alterations, erasures, or signs of tampering.

**Authorization and Approval**: Ensure proper authorization by competent authority before execution. Verify that approval signatures/initials match the delegated authority limits.

**Arithmetic Accuracy**: Verify all calculations, extensions, totals, and GST/ta…

Question 2

State with reasons (in short) whether the following statements are correct or incorrect.

Accepted Answer

(i) **INCORRECT**. The Revised Schedule VI applies to all companies (public and private) under the Companies Act, 1956 from FY 2012-13, not only Public Limited Companies. The revision of Schedule VI was applicable to all entities covered under the Companies Act without restriction to company type.

(ii) **CORRECT**. Specific disclosure of fundamental accounting assumptions (Going Concern, Accruals Concept, Consistency) followed in preparing financial statements is mandatory. This disclosure is required under Schedule VI and Accounting Standards to enable users to understand the basis of financial statements.

(iii) **INCORRECT**. A Whole Time Director is not automatically entitled to remuneration. Under Section 197 of the Companies Act, 2013, remuneration of directors requires approval by the Board of Directors and Shareholders in General Meeting. Remuneration cannot be granted without such approvals.

(iv) **CORRECT**. Companies (Auditor's Report) Order, 2003 provides exemption from its applicability for Private Limited Companies whose paid-up capital and reserves do not exceed fifty lakhs. Such companies are exempt from the requirements of CARO 2003.

(v) **INCORRECT**. This definition describes 'Errors of Omission', not 'Errors of Commission'. Errors of Omission occur when a transaction is wholly or partially omitted from the books. Errors of Commission occur when an entry is recorded but with an incorrect amount or credited/debited to a wrong account.

(vi) **INCORRECT**.…

Question 3

ABC Ltd., a government company came into existence in year 2012.

Accepted Answer

The question provided is incomplete. It only states that 'ABC Ltd., a government company came into existence in year 2012' but does not pose any specific question or ask for any analysis. To provide a proper CA Intermediate level answer, please clarify what aspect of this government company is being tested - such as: (a) compliance requirements under the Companies Act 2013, (b) obligations and privileges of government companies, (c) appointment and qualification of directors, (d) audit requirements under CARO 2020, (e) secretarial standards, or (f) any other governance or statutory matter. Government companies are defined under Section 2(45) of the Companies Act 2013 as any company in which not less than 51% of the paid-up share capital is held by the Central Government, or any State Government, or both.

Question 4

The Board of Directors can fill the casual vacancy caused by the resignation of an auditor, who shall hold office until the conclusion of the next annual general meeting.

Accepted Answer

The statement is **correct with important conditions**. Section 141 of the Companies Act 2013 provides the mechanism for filling casual vacancies in the office of auditor.

**Key provisions for filling a casual vacancy:**

When a casual vacancy occurs due to resignation, removal, or any other reason, the **Board of Directors** has the power to appoint an auditor to fill such vacancy at a Board meeting. The auditor so appointed shall hold office for the **remainder of the original auditor's term, until the conclusion of the next Annual General Meeting (AGM)**.

**Essential conditions for such appointment:**

First, the person appointed must satisfy the eligibility criteria under Section 141 of the Companies Act 2013. They must not be disqualified under Section 141, which excludes those with financial interest in the company, undischarged insolvents, and persons convicted of specified offences.

Second, the appointment must be approved by the **members at the next General Meeting**. The Board's power is not absolute—approval is mandatory. The auditor appointed by the Board shall continue to hold office only until such approval is obtained.

Third, the auditor must provide a **written consent** and a declaration confirming their eligibility and independence before the appointment is finalized.

Fourth, in case of resignation causing the casual vacancy, the resigning auditor must provide written notice to the company and to the Central Government (if applicable), which must be fi…

Question 5

How will you vouch/verify the following?

Accepted Answer

**Vouching and Verification of the Following:**

**(a) Preliminary Expenses**

Preliminary expenses are incurred at the time of formation of a company. To vouch/verify preliminary expenses, the auditor should: (i) Examine the **Memorandum and Articles of Association** to verify the authority for incurring such expenses. (ii) Vouch each item of expense with relevant **receipts, invoices, and agreements** (e.g., legal fees, registration fees, printing charges). (iii) Verify that expenses are **genuine and properly authorized** by the Board of Directors. (iv) Ensure compliance with **Section 35D of the Income Tax Act, 1961** regarding amortisation. (v) Check whether the accounting treatment follows **AS 26 (Intangible Assets)** — preliminary expenses are generally written off in the year of incurrence as per current standards and cannot be carried forward as an intangible asset. (vi) Confirm adequate **disclosure in financial statements** as per Schedule III of the Companies Act, 2013.

**(b) Building**

Building is a fixed asset and requires both vouching of additions and physical verification. The auditor should: (i) Examine the **title deed** in the name of the company to confirm ownership. (ii) Vouch purchase of building with **sale deed, conveyance deed, purchase agreement**, and verify payment through bank statements. (iii) For **self-constructed buildings**, verify architect's certificates, contractors' bills, and board resolutions authorising construction. (iv) Conduct o…

Question 6

निम्नलिखित का विश्लेषण / प्रभाव क्या होता ? (Analyze/Discuss the following)

Accepted Answer

**Accounting Treatment and Auditor's Approach:**

**（a) Preliminary Expenses**

Preliminary expenses are one-time costs incurred before the company commences business operations, such as incorporation fees, registration charges, legal and professional fees, brokerage, and underwriting commission. Per Schedule II of the Companies Act 2013, these are classified as **intangible assets** and must be capitalized in the Balance Sheet. They should be amortized over a period of **5 years** on a straight-line basis commencing from the year in which business commences. As per **AS 26 (Intangible Assets)**, these meet the definition of intangible assets with identifiable costs and measurable future benefits. The auditor must verify that only genuine preliminary expenses are capitalized, obtain evidence of their actual incurrence before business commencement, ensure the amortization schedule is correctly applied, and check for any partial write-off if the asset life is shorter than 5 years. Non-preliminary expenses (e.g., repairs to rented premises) must not be capitalized.

**（b) Building**

Buildings qualify as **tangible fixed assets** under **AS 16 (Fixed Assets) / Ind AS 16** and must be capitalized at their acquisition cost, including purchase price, import duties, legal fees, and direct construction costs. Crucially, the cost of **land must be segregated** from the building cost since land is **not depreciable** (indefinite useful life). The building itself is depreciated per Sche…

Question 7

Discuss with reference to SAs:

Accepted Answer

**Part (a): Written Representations [SA 580]**

**Meaning of Written Representations:**
As per **SA 580 – Written Representations**, a written representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations are necessary audit evidence, but they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. They are not a substitute for other audit procedures.

Management must provide written representations regarding: (i) fulfillment of their responsibilities for the preparation of financial statements in accordance with the applicable financial reporting framework; (ii) that all transactions have been recorded and reflected in the financial statements; and (iii) that they have provided the auditor with all relevant information and access as agreed.

**Dealing with Non-Provision of Written Representations:**
If management does not provide one or more of the requested written representations, the auditor shall:

1. **Discuss the matter with management** to understand the reasons for refusal.
2. **Re-evaluate the integrity of management** and evaluate the effect this has on the reliability of representations (oral or written) and audit evidence in general.
3. **Take appropriate actions** — If the written representations relate to matters that are **fundamental** to the financial statements (i.e., representations required under SA …

Question 8

Auditor's opinion and procedures related to:

Accepted Answer

**(a) Written Representation – Requirements and Auditor Procedures**

Under **SA 580 – Written Representations**, the auditor must obtain written representations from management to support audit evidence. These are management's assertions about facts, transactions, and assertions made in writing.

**Requirements:**
Representations must be addressed to the auditor and signed by appropriate members of management (CEO/CFO or equivalent) on the entity's letterhead. The letter should be dated near the auditor's report date. Key representations include: management's responsibility for financial statements and their compliance with applicable accounting standards; completeness of information disclosed during the audit; assertions about specific transactions, balances, and disclosures; events after the balance sheet date requiring adjustment or disclosure; and absence of fraud affecting financial statements.

**Auditor's Procedures:**
The auditor must: evaluate reliability of representations by cross-checking with other audit evidence obtained; never rely solely on written representations in isolation; investigate and resolve any conflicts between representations and audit evidence; obtain representations in all areas where management possesses unique knowledge; and document the nature, content, and date of representations in working papers. If management refuses to provide representations on material matters, the auditor should modify the opinion.

**(b) Going Concern Assumption – A…

Question 9

Test Checking techniques and Local Bodies

Accepted Answer

**PART (A): TEST CHECKING TECHNIQUES**

**Definition of Test Checking:** Test checking (also called Selective Audit or Sampling) is an audit technique where the auditor examines a representative sample of transactions, records, and supporting documents instead of verifying the entire population. Based on the sample examination, the auditor forms conclusions about the reliability of the entire set of records. This technique is essential because 100% verification is often impractical, time-consuming, and economically unviable.

**Key Principles:** The sample must be representative of the population, selected objectively, and sufficient in size to draw reasonable conclusions.

**Types of Test Checking Techniques:**

**1. Statistical Sampling:** Based on mathematical probability theory
- **Random Sampling:** Each item has equal chance of selection; uses random number tables or computerized selection
- **Stratified Sampling:** Population divided into homogeneous strata; samples taken proportionately from each stratum (e.g., separating large and small transactions)
- **Systematic Sampling:** Every nth item selected after fixing sampling interval (e.g., every 10th invoice)
- **Cluster Sampling:** Population divided into clusters; entire clusters selected and items within examined

**2. Non-Statistical (Judgmental) Sampling:** Based on auditor's professional judgment
- **Block Sampling:** Consecutive items selected for testing (e.g., all transactions in January)
- **Haphazard Selecti…

Question 10

Auditing procedures and hospital audit

Accepted Answer

**Part (a): Analytical Review Procedures and Verification of Debtors**

**Analytical Review Procedures** are defined under **SA 520 – Analytical Procedures** as evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. They also encompass the investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ significantly from expected values.

**Nature and Purpose:** Analytical procedures are used at three stages of an audit: (i) during planning (to understand the entity and identify risk areas), (ii) as substantive procedures (to obtain audit evidence), and (iii) near the end of the audit (overall review to confirm consistency of conclusions). These procedures help the auditor identify unusual transactions, events, amounts, ratios, and trends.

**Types of Analytical Procedures:**

**1. Ratio Analysis** – Comparing current ratios (e.g., debtors turnover, gross profit ratio) with prior periods, budgets, or industry norms to identify significant deviations.

**2. Trend Analysis** – Examining financial data over multiple periods to detect unusual movements.

**3. Reasonableness Tests** – Estimating an expected amount based on relationships and comparing it with the recorded amount (e.g., estimating interest expense based on average borrowings and interest rate).

**4. Regression Analysis** – A statistical technique to quantify the expected relationship…

Question 11

Analytical procedures and hospital audit

Accepted Answer

**PART (A): ANALYTICAL REVIEW PROCEDURES AND VERIFICATION - SIMILARITIES**

Analytical Review Procedures (ARP) and Verification procedures are both substantive audit procedures employed to gather audit evidence and reduce audit risk. Their key similarities are:

**1. Substantive Procedure Nature**: Both ARP and Verification are substantive procedures designed to obtain audit evidence about the completeness, accuracy, and validity of transactions and account balances recorded in the financial statements, as per SA 330.

**2. Assertion Testing**: Both procedures test various management assertions including existence/occurrence, completeness, accuracy/valuation, cut-off, and rights and obligations of financial statement items.

**3. Evidence Accumulation**: Both gather audit evidence by examining relationships and consistency between different items of financial data, comparing recorded transactions with supporting documentation, and identifying inconsistencies requiring further investigation.

**4. Risk-Based Assessment**: Both procedures are performed based on assessed risk of material misstatement at the assertion level. The extent and depth of both procedures are modified based on the auditor's risk assessment.

**5. Professional Judgment Application**: Both require significant application of professional judgment in identifying risk areas, determining sample size and selection method, evaluating results, and determining whether the evidence obtained is sufficient and approp…

Question 12

Write short notes on any four of the following:

Accepted Answer

The following are short notes on all five sub-parts (student to attempt any four):

**(a) Revenue Expenses Regarded as Capital Expenditure When Creating an Asset**

The general principle is that expenditure incurred to acquire or create a fixed asset is **capital in nature**, while expenditure incurred to maintain the business is **revenue in nature**. However, certain expenses which are ordinarily of a revenue nature get converted into capital expenditure when they are incurred in connection with the creation or acquisition of a fixed asset. Examples include:

1. **Wages and salaries** paid to workers engaged in constructing a building for own use — though wages are normally a revenue charge, here they form part of the cost of the asset.
2. **Interest on borrowed capital** used to finance the construction of an asset during the pre-commissioning/construction period (capitalised as per **AS 16 – Borrowing Costs**).
3. **Legal and professional fees** paid for acquiring land or a patent.
4. **Freight and cartage** incurred to bring a machine to the factory premises.
5. **Trial run expenses** incurred before a plant is ready for commercial production.

The guiding principle is that if the expenditure adds to the earning capacity or creates a new asset, it is capital; if incurred merely to maintain existing capacity, it is revenue.

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**(b) Conditions for Issue of Shares at a Discount**

Under **Section 53 of the Companies Act, 2013**, a company is **prohibited** from issuing …

Question 13

निम्नलिखित में क्या मतलब होता है ? (What is the meaning/significance of the following?)

Accepted Answer

**(a) Share Capital Reduction Procedures (Section 66, Companies Act 2013)**

**Capital reduction** means reducing the subscribed share capital of a company by cancelling paid-up capital that is lost or unrepresented by available assets, or by paying off surplus capital. The procedure is as follows:

1. **Board Resolution**: The Board first approves the proposal for reduction.
2. **Special Resolution**: A special resolution must be passed by shareholders in a general meeting.
3. **Application to NCLT**: The company must apply to the **National Company Law Tribunal (NCLT)** for confirmation.
4. **Notice to Creditors**: NCLT directs the company to give notice to all creditors. Creditors can object if their interest is likely to be prejudiced.
5. **Settlement of Creditors' Claims**: The company must settle or secure the claims of dissenting creditors.
6. **NCLT Order**: NCLT passes an order confirming the reduction after being satisfied that creditors' interests are protected.
7. **Filing with ROC**: A certified copy of the NCLT order along with the minute (showing altered capital) is filed with the **Registrar of Companies (ROC)**.
8. **Alteration of MOA**: The Memorandum of Association is altered to reflect the reduced capital.

Once registered, the reduction takes effect and the minute is deemed to be substituted for the corresponding provisions in the MOA.

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**(b) Conditions for Issue of Shares at a Discount**

Under **Section 53 of the Companies Act 2013**, a company is …

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