Question 1

M Ltd has given certain loans to related parties and also has accepted certain deposits. As an auditor, how you would handle the above items in paragraph 3 of CARO 2015?

Accepted Answer

**Related Party Transaction Audit Procedures Under CARO 2015 – Paragraph 3**

As an auditor, handling loans given to related parties and deposits accepted requires systematic procedures to ensure identification, verification, proper accounting treatment, and adequate disclosure.

**Identification of Related Parties and Transactions:**
First, obtain a complete schedule of related parties from management, including directors, key management personnel, their relatives, and entities under their control or significant influence as per Accounting Standard 18 (Related Party Disclosures). Request management to provide a list of all related party transactions during the period, including loans given and deposits accepted.

**For Loans Given to Related Parties:**
Verify the authorization by reviewing Board minutes and resolutions approving the loans. Confirm the terms including principal amount, interest rate, repayment period, and security (if any). Test the accounting entries to ensure the loans are correctly recorded in the balance sheet. Verify that the interest income has been properly recognized in the profit and loss account. Check that loans comply with Section 185 and 186 of the Companies Act, 2013 regarding restrictions on loans to directors and related parties. Assess whether the loan terms are at arm's length rates or if any departure requires disclosure.

**For Deposits Accepted from Related Parties:**
Verify the authorization and approval by the Board, particularly under …

Question 2

Discuss and explain the policies and procedures of assessing the final audit file on a timely basis after the date of auditor's report under SA 230.

Accepted Answer

**SA 230 – Audit Documentation: Final Audit File Assessment**

**Purpose and Definition**
SA 230 requires auditors to assemble a final audit file on a timely basis after the date of the auditor's report. The final audit file represents a complete and organized compilation of all significant audit work performed, evidence obtained, and conclusions reached during the audit engagement. This ensures that the audit work is properly documented and accessible for quality review and regulatory scrutiny.

**Timing Requirements**
Under SA 230, the auditor must establish policies and procedures requiring the final audit file to be completed within a reasonable time after the date of the auditor's report. While the standard does not specify an exact timeframe, the completion should occur on a timely basis—typically within 60 days of the report date, though this may vary depending on firm size, complexity, and jurisdictional requirements. The objective is to finalize the file while audit details remain fresh and before the retention period commences.

**Key Policies and Procedures**
The firm should establish documented policies addressing: (1) **Assembly responsibility**—designating personnel responsible for gathering, organizing, and reviewing all audit documentation; (2) **Completeness verification**—ensuring all working papers, audit schedules, correspondence, risk assessments, and management representations are included; (3) **File organization**—arranging documents in a logical seque…

Question 3

Inadequate internal control over assets may increase the susceptibility of misappropriation of those assets. State any three examples of such occurrence of misappropriation of such assets.

Accepted Answer

As per **SA 240 – The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements**, fraud involving misappropriation of assets occurs when employees or others steal assets of the entity. Inadequate internal controls create opportunities for such misappropriation. Three prominent examples are as follows:

**1. Embezzlement of Cash Receipts:**
Where there is inadequate segregation of duties over cash handling and recording, an employee who both receives cash and maintains the books of account can divert cash receipts before they are recorded. For instance, a cashier may collect cash from customers but record the sale at a lower amount or not record it at all, pocketing the difference. Absence of independent reconciliation of receipts with records facilitates this fraud.

**2. Theft of Physical Assets or Intellectual Property:**
When there are no proper physical safeguards, periodic physical verification, or access controls over inventory, fixed assets, or data, employees may steal physical goods (e.g., inventory items, raw materials, or equipment) or misappropriate intellectual property (e.g., confidential customer data or proprietary software). For example, a store-keeper with unrestricted access to the warehouse and no periodic stock verification can systematically remove inventory without detection.

**3. Payments for Goods or Services Not Received (Fictitious Vendors / Ghost Employees):**
In the absence of adequate controls over the purchase-to-pay cyc…

Question 4

There is no difference in provisioning of NPA as regards to categories under, whether the debt is secured or unsecured. Critically evaluate the statement on the basis of provisioning norms of NPA of nationalized bank.

Accepted Answer

**The statement is INCORRECT.** There ARE significant differences in NPA provisioning norms between secured and unsecured advances under RBI guidelines applicable to nationalized banks.

**Provisioning Norms for Secured NPAs:**

For advances where adequate security/collateral is available, the provisioning requirements are:

**Sub-standard category:** 15% provision on outstanding balance. **Doubtful category (1st year):** 25% provision. **Doubtful category (2nd and 3rd year):** 40% provision. **Doubtful category (thereafter):** 100% provision. **Loss category:** 100% provision.

**Provisioning Norms for Unsecured NPAs:**

For advances without adequate security or collateral, the requirements are:

**Sub-standard category:** 25% provision on outstanding balance. **Doubtful category (all periods):** 100% provision. **Loss category:** 100% provision.

**Key Differences:**

The unsecured advances attract **higher provisioning** at every stage compared to secured advances at the same NPA category. For instance, a Sub-standard advance attracts 15% for secured but 25% for unsecured—a 10 percentage point difference. In the Doubtful category, secured advances have graduated provisioning (25%, 40%, 100%) spread over time, while unsecured advances immediately attract 100% provisioning.

**Rationale for Differentiation:**

The differentiation is based on **risk assessment and recovery prospects.** Secured advances have tangible collateral/security available for realization, reducing ulti…

Question 5

In the case of audit of a charitable institution, what attention should be paid by auditor regarding audit of expenditure items?

Accepted Answer

When auditing expenditure items of a charitable institution, the auditor must pay attention to the following key aspects:

**Compliance with Objects and Purposes:** The auditor must ensure that all expenditure is incurred for the purposes and objects specified in the governing document (trust deed, bye-laws, memorandum, or constitution). Expenditure outside these objects is improper and violates the institution's charter. The auditor should verify that significant items of expenditure align with the stated charitable mission.

**Restrictions on Donations and Grants:** Many donations or grants come with specific restrictions on their utilization. The auditor must ensure that expenditure is made strictly in accordance with donor restrictions and conditions. Funds received for specific purposes should be utilized only for those purposes. Cross-checking donor communications and restricting conditions is essential.

**Prohibition of Private Benefit:** A fundamental principle of charitable institutions is that no private benefit should accrue to trustees, members, or related parties. The auditor must examine that expenditure does not result in private enrichment or distributions to insiders. Reasonable remuneration for services is permissible, but excessive payments or personal benefits are not.

**Proper Authorization:** All material expenditure should be properly authorized according to the institution's bylaws and policies. The auditor should verify that expenditure has been san…

Question 6

Discuss any four important points that would attract your attention while audit.

Accepted Answer

As the auditor of M/s. Divine Children Hospital, the following four important points would attract my attention during the audit:

**(a) Verification of Income from Medical Services:**
Hospitals derive income from multiple sources such as consultation fees, operation theatre charges, room rent, laboratory charges, pharmacy sales, and ambulance charges. I would verify that all income streams are completely recorded and that there is no suppression of receipts. I would cross-check cash collections with bed occupancy registers, OT (operation theatre) registers, and appointment records. Since hospitals often deal in cash, the risk of revenue leakage is high. I would also verify insurance reimbursements (including Ayushman Bharat/CGHS claims) are properly accounted for and outstanding receivables are followed up.

**(b) Verification of Stocks — Medicines, Consumables and Equipment:**
Pharmacy stocks and medical consumables (syringes, IV fluids, surgical instruments, etc.) represent a significant portion of hospital expenditure. I would verify the physical stock of medicines against bin cards and stock registers, check for expired medicines written off properly, and ensure proper documentation for high-value items like implants and surgical kits. For capital equipment such as ventilators, incubators (critical in a children's hospital), and diagnostic machines, I would verify proper capitalisation as per **AS 10 (Property, Plant and Equipment)**, along with depreciation charged at a…

Question 7

This appears to be a multi-part question from a suggested answer document. Parts (c) and (d) are visible below.

Accepted Answer

**Part (c): Engagement Team Discussion on Material Misstatement Responsibility**

As per SA 240 and SA 315, the engagement team discussion should critically include the following points:

**Fraud Risk Assessment and High-Risk Areas** — The team must discuss specific areas where material misstatement through fraud could occur in the bank's financial statements, such as manipulation of loan loss provisions, improper asset classification, revenue recognition policies, and interest income recording. Discussion should identify complex transactions and significant management judgments prone to manipulation.

**Evaluation of Internal Controls** — The team should discuss the adequacy and effectiveness of internal controls to prevent or detect material misstatements. This includes control environment, segregation of duties, authorization procedures, and reconciliation controls. The reliance placed on controls should be critically assessed, particularly for high-risk transactions.

**Professional Skepticism** — The team must commit to maintaining a questioning mind throughout the audit. Discussion should emphasize avoiding assumptions about management's integrity and remaining alert to management override of controls, which is a significant risk in banking operations.

**Management Override Risks** — Specific discussion on how management could circumvent controls through manipulation of accounting records, authorization of unauthorized or inappropriate transactions, alteration of finan…

Question 8

Discuss the points to be considered by auditor for the purpose of commenting on audit programme.

Accepted Answer

An **audit programme** is a detailed plan specifying the audit procedures to be performed. The auditor must consider several critical points when commenting on or evaluating an audit programme to ensure it is adequate, effective, and compliant with audit standards.

**Alignment with Audit Objectives**: The programme must clearly link each procedure to specific audit objectives for each transaction cycle or account. Procedures should be designed to test specific assertions such as existence, completeness, valuation, and presentation. The auditor must verify that all significant audit objectives have corresponding procedures.

**Risk Assessment Considerations**: The programme should be directly based on identified and assessed risks (inherent and control risks). Higher-risk areas should have more extensive and detailed procedures, while lower-risk areas may warrant less testing. The nature, timing, and extent of procedures must be proportionate to the assessed risk level at the assertion level, in accordance with **SA 330** (The Auditor's Responses to Assessed Risks).

**Materiality and Performance Materiality**: Procedures must be designed considering overall materiality and performance materiality levels as per **SA 320** (Materiality in Planning and Performing an Audit). Sample sizes, testing thresholds, and tolerable misstatements should reflect these materiality levels. The programme should specify how materiality considerations affect the extent of testing.

**Nature and …

Question 9

Before the commencement of audit, the joint auditors should discuss and develop a joint audit plan. Discuss the points for developing the joint audit plan by the joint auditors.

Accepted Answer

Joint auditors must develop a comprehensive joint audit plan before commencing audit work to ensure coordinated, effective, and efficient audit execution. The key points for developing the joint audit plan are:

**Understanding of the Entity and Its Environment**: Both auditors should collectively obtain knowledge of the client's business, operations, accounting systems, internal control environment, regulatory framework, and industry-specific requirements to identify audit risks and plan appropriate procedures.

**Assessment of Risk of Material Misstatement**: Joint auditors should jointly assess inherent risk, control risk, and overall audit risk for the entity and specific account balances or transaction classes. This assessment guides the nature, timing, and extent of audit procedures.

**Materiality Determination**: The auditors should jointly determine overall materiality and performance materiality for the audit. Separate materiality levels may also be set for specific account balances or transaction classes where applicable.

**Allocation of Audit Responsibilities**: A clear division of audit work between the two auditors should be established, specifying which auditor will be responsible for auditing specific locations, branches, business units, or areas of operations, ensuring comprehensive coverage without gaps or duplication.

**Coordination and Communication Framework**: The plan must establish formal mechanisms for regular communication and coordination, includi…

Question 10

Board of Directors of HS Ltd wants to resign CA S. a practicing Chartered Accountant, as internal auditor of the company or they believe that they could not represent to anybody else practicing chartered accountants.

Accepted Answer

**Legal Framework:** While the Companies Act, 2013 provides detailed procedures for removal of statutory auditors under Section 140, internal auditors (appointed by the Board under Section 138 and Companies (Accounts) Rules, 2014) can be removed by the Board of Directors itself. However, the removal process must adhere to principles of natural justice and fair procedure.

**Procedure for Removal of Internal Auditor:**

The Board of Directors must follow proper procedure:

1. **Notice to Auditor:** The auditor must be given written notice clearly stating the grounds and reasons for proposed removal. Vague or unjustified removals violate principles of natural justice.

2. **Right to Make Representations:** CA S must be given a reasonable opportunity to submit written or oral explanations regarding the grounds for removal. The auditor's response must be considered before final decision.

3. **Board Resolution:** A formal Board resolution must be passed, documenting the grounds, the auditor's representations, and the Board's findings.

4. **Justifiable Grounds:** Removal must be based on valid grounds such as: breach of engagement terms, conflict of interest, inefficiency in audit work, violation of professional ethics (as per SA 200 and SA 300), or non-compliance with applicable auditing standards.

5. **Official Communication:** Formal communication of removal must be issued, specifying the effective date and reasons in a professional manner.

**Critical Point:** If the Board c…

Question 11

Examine the components of the revised format of MD of AS No. 4 with respect to provisions of Companies Act, 2015.

Accepted Answer

The question likely refers to **Management Discussion & Analysis (MD&A)** requirements rather than AS 4 (which addresses contingencies). However, MD&A format is prescribed under **Schedule III of the Companies Act 2013**, not explicitly as AS 4.

**Components of revised MD&A format per Companies Act 2013, Schedule III:**

**Industry Structure and Development:** Discussion of overall industry trends, changes, and company's position within the industry landscape. Companies must provide context on how external factors influenced performance.

**Opportunities and Threats:** Identification and analysis of market opportunities that the company can capitalize on, and potential threats or challenges that may impact future operations. This includes competitive pressures and regulatory changes.

**Segment-wise Performance:** Detailed discussion of performance across different business segments or geographical segments. Comparison with previous year to highlight growth or decline in each segment.

**Outlook:** Forward-looking statements regarding anticipated performance, planned initiatives, and strategic direction. This should be reasonable and based on verifiable assumptions.

**Financial Performance Analysis:** Discussion of financial results including revenue, profitability, margins, and financial ratios. Changes in working capital, cash flows, and debt position must be explained.

**Human Resources and Industrial Relations:** Overview of HR policies, workforce composition, recruitm…

Question 12

CA A, auditor of ABC Ltd wants to design alternative audit procedure and for that he wants to check whether the data in respect are reliable for purpose of designing data and statistical procedures.

Accepted Answer

**Assessing Data Reliability for Alternative Audit Procedures**

**Overview**: Before designing analytical procedures or statistical methods for substantive audit procedures, the auditor must evaluate whether the underlying data is sufficiently reliable. Per SA 500 (Audit Evidence), the auditor must assess the reliability of audit evidence, including data used in analytical procedures.

**Key Factors for Evaluating Data Reliability**:

**1. Source of Data**: The auditor must understand the source—whether from internal systems, external parties, or third-party providers. Data originating from well-controlled internal systems with strong IT governance is generally more reliable than externally sourced or manually maintained data.

**2. System Controls and Accuracy**: The auditor should evaluate the strength of internal controls governing data collection, processing, and maintenance. Systems with strong preventive and detective controls produce more reliable data. Weaknesses in controls over data integrity should lower reliance on that data.

**3. Completeness and Consistency**: The data should be complete (no omissions), consistently recorded throughout the period, and free from duplicates. Any changes in recording methods or system configurations during the period must be identified and understood.

**4. Reconciliations and Validations**: The auditor should verify reconciliations between data sources (e.g., general ledger to subsidiary records), test management's data validati…

Question 13

When corresponding figures are presented, the auditors' report shall not refer to the corresponding figures. Discuss the exceptions of the above statement when the prior period statements are audited.

Accepted Answer

**Governing Standard: SA 710 – Comparative Information (Corresponding Figures and Comparative Financial Statements)**

Under SA 710, when comparative information is presented as **corresponding figures**, the auditor's report on the current period shall, as a **general rule, not refer to the corresponding figures**, because such figures form an integral part of the current period financial statements and the auditor's opinion covers them only insofar as they relate to the current period presentation.

However, when the **prior period financial statements were audited**, SA 710 carves out the following **exceptions** where the auditor's report shall or may refer to the corresponding figures:

**Exception 1 – Prior Period Audit Report Contained a Modified Opinion and the Matter Remains Unresolved**

If the prior period auditor's report included a **qualified, adverse, or disclaimer of opinion**, and the underlying matter giving rise to that modification is **still unresolved** in the current period, the auditor **shall modify the current period opinion** as well. Because the basis for modification necessarily involves the corresponding figures, the auditor's report will refer to those figures in the Basis for Qualified/Adverse/Disclaimer of Opinion paragraph. SA 710 requires the auditor to include an **Other Matter paragraph** describing the nature of the prior modification where relevant.

**Exception 2 – Prior Period Modified Opinion, But Matter is Now Resolved**

If the matt…

CA Inter FM + SM

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap