AFD

INTERMEDIATE COURSE– FAST Paper - 5: Auditing & Ethics

Full Test Series - Paper 3
Total No. of Questions in Part I – 15 Maximum Marks – 30
Total No. of Questions in Part II – 6 Maximum Marks – 70
Total No. of Pages - 34
GENERAL INSTRUCTIONS TO CANDIDATES
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Multiple Choice Questions (MCQs).
3. Part II comprises questions which require descriptive type answers.
4. Ensure that you receive the question paper relating to both the parts. If you have
not received both, bring it to the notice of the Institute.
5. Answers to MCQs in Part I are to be mentioned in the first page of your answer
copy. Students need to only mention their choice of correct option like (a) or (b) or
so. No explanations or reasonings are required for MCQs.
6. Answers to descriptive questions in Part 2 should be given from the next page of
your answer sheet
7. Student should mention their Name, Batch, Course (CA Inter / Final), Subject
Name, Date of Test and Test Code as given on top of this sheet on the first
page before answering the MCQs.
8. Once the test is complete, student need to scan the answer sheet and make single
pdf file for all the pages and email it to faststudentcare@[Link] and
fasttestseries@[Link] with Subject Line – Answers Sheet for Test (Code) and
Your Name.
9. Duration of the examination is 1.5 hours. You will be required to upload the
answer sheets on the same date / time of test as defined in your live class else the
answer sheet will not be evaluated. In such case you should do a self-evaluation
using the suggested answer which will be posted in the same folder after one day
of the date of test.
10. The FAST examiner team will check the copy and give the marks alongwith
feedbacks for your improvements. We take utmost care in checking however being
subjective in nature the checking may differ from examiner to examiner.
11. Candidate are advised not to cheat and have self-discipline as these tests are
preparing you better for your real exams and hence realistic assessment will help
you take corrective actions at the right time.
12. FAST reserves the right to display any answers or answer sheets or share with
other students for your benefits without any prior written or express consent.
13. You suggestions on the test paper or evaluation or else can be shared at
casj@[Link]
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PART 1
Case Scenario -1
CA Sanjoy is conducting audit of PETA Education Solutions Private Limited for
the first time. The company is engaged in providing solutions to students
appearing for competitive exams under engineering and medical streams.
Company’s business is operated from physical centres spread in many states
of the country. However, of late, number of aspirants availing company’s
services are shrinking due to emergence of new competitors and inability of
company to switch to new technologies available in market to render its
services.
The company had taken bank loans in past years for expansion of its physical
centres. However, due to reduction in strength of aspirants opting for services
provided by the company, management is always looking for means to meet
its financial commitments on time. During the course of audit, CA Sanjoy
wants to be sure about revenue and profit assertions reflected in financial
statements of the company. Therefore, he is planning to test company’s
system for booking revenue in its books of accounts.
He notices that during the year under consideration, many experienced
teaching faculties have left due to late payment of their contractual payments
by the company. These have been replaced by inexperienced faculties having
lower contractual costs but leading to poor satisfaction outcomes among
aspirants. Besides, employee turnover of regular administrative staff also
remains high. The company has not organized any training programmes
either for its faculties or administrative staff for considerable period of time.
He has, in his wisdom, decided to increase the area of substantive checking in

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the company. He does not want to suffer from probable adverse publicity or
loss of his professional goodwill.

Based on the above facts, answer the following:- (Q.1-5) (5 x 2 = 10)

1. After studying description of the company and its nature of operations,

which of following statements is most appropriate?
(a) Inherent risk for revenue and profit assertions is likely to be lower.
(b) Inherent risk for revenue and profit assertions is likely to be higher.
(c) Inherent risk for revenue and profit assertions cannot be assessed
from given situation.
(d) There does not exist inherent risk for revenue and profit assertions
in described situation.

2. The case scenario describes a situation of leaving of experienced

faculties, high employee turnover and absence of training programmes
for staff of the company. Such indicators are an example of____________?
(a) Unsatisfactory risk assessment process used by the company
(b) Unsatisfactory control environment of the company
(c) Unsatisfactory performance reviews carried out by the company
(d) Unsatisfactory system of segregation of duties in the company

3. The auditor is planning to test company’s system for booking revenue in

its books of accounts. Identify the correct statement in this regard:-
(a) He is likely to place greater reliance on controls relating to booking
of revenue.
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(b) He is likely to place lower reliance on controls relating to booking
of revenue.
(c) Reliance placed by him on controls relating to booking of revenue
would be unaffected due to reduction in contractual costs by
company.
(d) Reliance placed by him on controls relating to booking of revenue
would be unaffected due to shrinking number of aspirants.

4. The auditor has increased area of “substantive checking” in the

company. It is due to the reason that ________________
(a) he wants to lower detection risk
(b) he wants to lower control risk
(c) he wants to raise sample risk
(d) he wants to lower inherent risk

5. The auditor does not want to suffer from probable adverse publicity or
loss of professional goodwill. Such a situation is indicative of ___________ ?
(a) audit risk (b) auditor’s business risk
(c) auditor’s detection risk (d) non-sampling risk

ANSWERS

1. (b) 2. (b) 3. (b) 4. (a) 5. (b)

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Case Scenario -2
CA M. Raja has accepted offer of appointment of auditor of an entity. As
business carried on by the entity is new to him, he wants to gain an
understanding about the entity and its environment including its internal
control. In this regard, he has performed procedures to obtain audit evidence
about design and implementation of relevant controls. He has performed
various procedures like inquiry, inspection and observation in this regard.
He wants reasonable assurance that accounting system is adequate and that
all accounting information which should be recorded has, in fact, been
recorded.
Further, during the course of audit, he has noticed as under: -
• As required by the management, bank reconciliation is required to be
performed monthly. However, the same is not carried out as stipulated
due to time constraints faced by accountant.
• The entity has a system of procuring its raw material supplies on the basis
of valid purchase orders issued by the entity. However, purchase orders
are not numbered in a sequence properly.
• Wage sheets are not verified by a responsible official as required by
management.
• Staff of the entity is responsible for bringing cash from centers in nearby
areas to entity’s premises from where it is deposited into entity’s bank
account. However, concerned officer has not renewed insurance for cash
in transit.

Based on the above facts, answer the following:- (Q.6-9) (4 x 2 = 8)

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6. The auditor has performed procedures to obtain audit evidence about
design and implementation of controls. Which of the following
procedures is more reliable to obtain audit evidence relating to
application of a control?
(a) Observing application of control
(b) Inspecting documentation pertaining to control
(c) Inquiry about application of control
(d) Studying design of control

7. Examination and evaluation of internal control is indispensable for CA

M. Raja. It provides him necessary comfort relating to completeness of
accounting information. However, review of internal controls of the
entity will not enable him to know ________
(a) whether errors or frauds are likely to be located in ordinary course
of operations of business
(b) whether an effective internal audit department is operating
(c) whether his opinion needs modification
(d) whether any administrative control has bearing on his work

8. As regards weaknesses identified by the auditor in control system,

which of the following represent(s) significant deficiencies in internal
control?
(a) Not performing bank reconciliation timely and not verifying wage
sheets by responsible official only
(b) Not performing bank reconciliation timely and lack of proper
sequence in purchase orders only
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(c) Not performing bank reconciliation timely, lack of proper sequence
in purchase orders, not verifying wage sheets by responsible official
and lack of insurance for cash in transit
(d) Lack of insurance for cash in transit only

9. Which of the following is most appropriate regarding auditor’s

responsibility in accordance with SA 265?
(a) To communicate significant deficiencies in internal control to
management
(b) To communicate significant deficiencies in internal control along
with explanation of their potential effects to management
(c) To communicate significant deficiencies in internal control along
with explanation of their potential effects, to provide sufficient
information to understand context of communication to
management and express opinion on effectiveness of internal
control
(d) To communicate significant deficiencies in internal control along
with explanation of their potential effects and to provide sufficient
information to understand context of communication to
management

ANSWERS

6. (a) 7. (c) 8. (c) 9. (d)

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10. UDIN (Unique Document Identification Number) is required to be stated
by practising Chartered Accountant on: -
(a) Each audit report only
(b) Each audit report and each certificate
(c) Each audit report issued under Companies Act, 2013 only
(d) Each audit report issued under Companies Act, 2013 only and each
certificate 2
Ans. (b)

11. A company auditor receives external confirmation from an entity to

whom company has sold goods. The said amount is properly classified
in financial statements of company. Which of the following statements is
not true in this regard?
(a) It shows that said trade receivable exists.
(b) It shows that said trade receivable is properly valued.
(c) It shows that company has a right to said trade receivable.
(d) It shows that amount of said trade receivable has been recorded in
proper account. 2
Ans. (b)

12. The LFAR is to be submitted before _______every year

(a) 30th April (b) 31st May
(c) 30th June (d) 30th September 2
Ans. (c)

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13. ABC Ltd is engaged in manufacturing of fabrics from yarn purchased
from different suppliers. Occasionally, it also manufactures fabrics tailor
made in accordance with requirements of certain mills from yarn
received from these mills. ABC Ltd raises bills of its labour charges only
on mills for converting yarn into fabrics. The auditor of ABC Ltd tries to
ensure that stocks of the company as at year end do not include stocks
pertaining to these mills. Which assertion auditor tries to verify in
above situation:
(a) completeness
(b) Occurrence
(c) rights and obligations
(d) cut -off 2
Ans. (c)

14. If the auditor of a company concludes that the written representations

are not reliable, what should be appropriate for him?
(a) The auditor shall take appropriate actions including determining
the possible effect on the opinion in the auditor’s report in
accordance with SA 705having regard to the requirement of
disclaimer of opinion.
(b) The auditor shall take appropriate actions including determining
the possible effect on the opinion in the auditor’s report in
accordance with SA 705 having regard to the requirement of
adverse opinion.
(c) The auditor shall take appropriate actions including determining
the possible effect on the opinion in the auditor’s report in
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accordance with SA 705 having regard to the requirement of
qualified opinion.
(d) The auditor shall report the matter to MCA directly. 2
Ans. (a)

15. Statement 1: Substantive Procedures alone can provide sufficient and

appropriate audit evidence at the assertion level.
Statement 2: Test of Controls are audit procedures designed to
evaluate the operating effectiveness of controls in prevention, detection
and correcting material misstatement at the assertion level.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect 2
Ans. (b)

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PART 2
DESCRIPTIVE QUESTIONS
1. Question paper comprises 6 questions. Answer to Question No. 1 is
compulsory and any 4 out of the remaining 5 questions
2. Working notes should form part of the answer.
3. Answers to the questions are to be given only in English except in the case of
candidates who have opted for Hindi Medium. If a candidate has not opted
for Hindi Medium, his/her answers in Hindi will not be evaluated.
4. Maximum Mark 70

1.
(A) Obtaining an understanding of the entity and its environment,
including the entity’s internal control, is a continuous, dynamic process
of gathering, updating and analysing information throughout the audit.
The understanding establishes a frame of reference within which the
auditor plans the audit and exercises professional judgment
throughout the audit. State few areas in which such an understanding
is helpful to auditor. 5
Ans.
Obtaining an understanding of the entity and its environment, including
the entity’s internal control, is a continuous, dynamic process of
gathering, updating and analysing information throughout the audit.
The understanding establishes a frame of reference within which the
auditor plans the audit and exercises professional judgment throughout
the audit, for example, when:

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1. Assessing risks of material misstatement of the financial statements
2. Determining materiality in accordance with SA 320
3. Considering the appropriateness of the selection and application of
accounting policies
4. Identifying areas where special audit consideration may be
necessary, for example, related party transactions, the
appropriateness of management’s use of the going concern
assumption, or considering the business purpose of transactions
5. Developing expectations for use when performing analytical
procedures
6. Evaluating the sufficiency and appropriateness of audit evidence
obtained such as the appropriateness of assumptions and of
management’s oral and written representations.

(B) Kundan, a CA student, is part of an engagement team conducting audit

of an entity. The audit procedures are nearing completion. He notices
that engagement partner has asked for a cash flow forecast from
management for next twelve months from date of financial statements.
Keeping in view above, answer the following: -
(i) Discuss likely purpose of engagement partner in the above
situation. Elaborate upon significance of such testing being
performed by engagement partner.
(ii) State any two audit procedures in relation to cash flow forecast
likely to be performed by engagement partner. 3+2

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Ans.
In the given situation, the engagement partner has asked for a cash flow
forecast from management for next twelve months from date of
financial statements. The audit procedures are also nearing completion.
Therefore, purpose of engagement partner in requiring a cash flow
forecast is to obtain sufficient appropriate audit evidence regarding and
to conclude on appropriateness of management’s use of going concern
basis of accounting in preparation of its financial statements. Further,
his purpose is also to conclude on basis of audit evidence obtained,
whether a material uncertainty exists related to events or conditions
that may cast a significant doubt on ability to entity to continue as a
going concern, and to report in accordance with SA 570.
The significance of testing going concern assumption is due to its effect
on preparation of financial statements. When the use of going concern is
considered as appropriate, assets and liabilities are recorded on the
basis that entity will be able to realize its assets and discharge liabilities
in normal course of business. In case it is not so viewed, financial
statements are prepared on liquidation basis. Hence, testing such an
assumption provides evidence to auditor whether use of such
assumption is appropriate or not.
Two audit procedures in relation to cash flow forecast likely to be
performed
• Evaluate reliability of underlying data generated to prepare the
forecast
• Determine whether there is adequate support for assumptions
underlying the forecast
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(C) Discuss the reporting requirements as per CARO, 2020, regarding:

(i) disputed and undisputed statutory dues and
(ii) internal audit system of the company 3+2
Ans.
Matters to be included as per CARO, 2020 :
Undisputed and Disputed Statutory dues
Clause (vii)
(a) whether the company is regular in depositing undisputed statutory
dues including Goods and Services Tax, provident fund, employees'
state insurance, income tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory dues to
the appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they
became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and
the forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as
a dispute).

Internal audit system

Clause (xiv)
(a) whether the company has an internal audit system commensurate
with the size and nature of its business;
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(b) whether the reports of the Internal Auditors for the period under
audit were considered by the statutory auditor.

2.
(A) Following is the extract from Schedule no. 10 of Advances as appearing
in financial statements of branch of anationalized bank for year ending
31st March, 2024.
Schedule 10 – Advances
S. Particulars Amount
No. (In ` Crores)
rounded off
1. Bills Purchased and Discounted 50.00
2. Cash credits, overdrafts and loans 150.00
repayableon demand
3. Term Loans 75.00
Total 275.00
In carrying out audit of above advances as part of statutory audit of
branch, a statutory auditor would obtain evidence about certain
matters. State those matters. 5
Ans.
In carrying out audit of advances, the auditor is primarily concerned
with obtaining evidence about the following: -
(i) Amounts are included in balance sheet in respect of advances
which are outstanding at the date of the balance sheet.
(ii) Advances represent amount due to the bank branch.
(iii) Amounts due to the bank branch are appropriately supported by
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loan documents and other documents as applicable to the nature
of advances.
(iv) There are no unrecorded advances.
(v) The stated basis of valuation of advances is appropriate and
properly applied and the recoverability of advances is recognised
in their valuation.
(vi) The advances are disclosed, classified and described in
accordance with recognised accounting policies and practices and
relevant statutory and regulatory requirements.
(vii) Appropriate provisions towards advances have been made as per
the RBI norms, Accounting Standards and generally accepted
accounting practices.

(B) With respect to audit in an automated environment, explain the

following: (Any Two)
(i) General (IT) Controls
(ii) Material Weakness
(iii) Data Processing 2+2

Ans.
(i) General (IT) Controls: Are a type of internal controls that help in
mitigating risks that arise due to use of information technology
and information systems in a business.
(ii) Material Weakness: A control deficiency or a combination of
deficiencies in internal controls that is important enough to merit
the attention of those charged with governance since there is a
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reasonable possibility that a material misstatement will not be
prevented or detected in a timely manner by management.
(iii) Data processing: Refers to the systematic recording, storage,
retrieval, modification and transformation of electronic data
using information systems.

(C) SQC 1 dwells upon engagement quality control review (EQCR) as part
of system of quality control in a firm.
Why is such a review required? For which type of engagements EQCR is
mandatory?
What should be approach of firm for engagements for which EQCR is
not mandatory? 3+2
Ans.
Significant judgments made in an engagement should be reviewed by an
engagement quality control reviewer for taking an objective view before
the report is issued. Engagement quality control review is mandatory
for all audits of financial statements of listed entities.
In respect of other engagements, firm should devise criteria to determine
cases requiring performance of engagement quality control review.
3.
(A) M/s S R & Associates are the Statutory Auditors of Vanee Textile and
Garments Ltd., a company engaged in the business of manufacturing of
various textile products. The auditor has completed the audit and is in
the process of forming an opinion on the financial statements for the
F.Y. 2023-2024. CA S, the engagement partner, wants to conclude
whether the financial statements as a whole are free from material
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misstatements, whether due to fraud or error. Guide him about the
factors he should consider to reach that conclusion. 5
Ans.
Factors to be considered to form an opinion:
The auditor shall form an opinion on whether the financial statements
are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
In order to form that opinion, the auditor shall conclude as to whether
the auditor has obtained reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error. That conclusion shall take into account:
(1) whether sufficient appropriate audit evidence has been obtained
(2) whether uncorrected misstatements are material, individually or
in aggregate.
(3) The evaluations required
(i) The auditor shall evaluate whether the financial statements
are prepared in accordance with the requirements of the
applicable financial reporting framework.
(ii) This evaluation shall include consideration of the qualitative
aspects of the entity’s accounting practices, including
indicators of possible bias in management’s judgments.

(B) The working papers of the branch auditor are also the property of the
Principal Auditor and the Management of the Company, so they have
right to access them. State the relevant SA and comment. 4

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Ans.
Ownership of Working Papers: As per SA 230 “Audit Documentation”,
working papers are the property of the auditor. He may at his
discretion, make available portions or extracts from his working paper
to his client. The auditor should adopt reasonable procedures for
custody and confidentiality of his working papers.
An auditor is not required to provide the management/ clients or other
auditors’ access to his working papers. Main auditor of the company does
not have right of access to the working papers of the branch auditor.
In the case of a company, the main auditor has to consider the report of
the branch auditor and has a right to seek clarification and to visit the
branch but cannot ask for the copy of working paper and therefore, the
branch auditor is under no compulsion to give photocopies of his
working paper to the principal auditor.
From above, it is clear that working papers of the branch auditor
are his property only and neither the Principal auditor not
management has right to access that. Therefore, statement given in the
question is incorrect.

(C) CA Kanika audited books of accounts of Engineering Ltd. for the

financial year 2022-2023. The auditor used an audit procedure
according to which all the documents and records maintained by the
company were checked in detail to obtain audit evidence. Explain the
audit procedure used by the auditor. Comment on reliability of audit
evidence obtained by performing such an audit procedure in some
situations. 3+2
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Ans.
Audit Procedure:
Inspection involves examining records or documents, whether internal
or external, in paper form, electronic form, or other media, or a physical
examination of an asset. In view of above, it can be concluded that CA
Kanika used Inspection as an audit procedure.
Inspection of records and documents provides audit evidence of varying
degrees of reliability, depending on their nature and source and, in the
case of internal records and documents, on the effectiveness of the
controls over their production.
Example of inspection used as a test of controls is inspection of records
for evidence of authorisation.
Some documents represent direct audit evidence of the existence of an
asset, for example, a document constituting a financial instrument such
as a inventory or bond. Inspection of such documents may not
necessarily provide audit evidence about ownership or value. In
addition, inspecting an executed contract may provide audit evidence
relevant to the entity’s application of accounting policies, such as
revenue recognition. Inspection of tangible assets may provide reliable
audit evidence with respect to their existence, but not necessarily
about the entity’s rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the
observation of inventory counting.

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4.
(A) An audit of Expenditure is one of the major components of Government
Audit. In the context of Government Expenditure Audit’, write in brief,
what do you understand by:
(i) Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against Provision of Funds
(iv) Propriety Audit
(v) Performance Audit. 5
Ans.
Government Expenditure Audit: Audit of government expenditure is
one of the major components of government audit conducted by the
office of C&AG. The basic standards set for audit of expenditure are to
ensure that there is provision of funds authorised by competent
authority fixing the limits within which expenditure can be incurred.
Briefly, these standards are explained below:
(a) Audit against Rules & Orders: The auditor has to see that the
expenditure incurred conforms to the relevant provisions of the
statutory enactment and is in accordance with the financial rules
and regulations framed by the competent authority.
(b) Audit of Sanctions: The auditor has to ensure that each item of
expenditure is covered by a sanction, either general or special,
accorded by the competent authority, authorising such
expenditure.
(c) Audit against Provision of Funds: It contemplates that there is a

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provision of funds out of which expenditure can be incurred and
the amount of such expenditure does not exceed the
appropriations made.
(d) Propriety Audit: It is required to be seen that the expenditure is
incurred with due regard to broad and general principles of
financial propriety. The auditor aims to bring out cases of
improper, avoidable, or in fructuous expenditure even though the
expenditure has been incurred in conformity with the existing
rules and regulations. Audit aims to secure a reasonably high
standard of public financial morality by looking into the wisdom,
faithfulness and economy of transactions.
(e) Performance Audit: This involves that the various programmes,
schemes and projects where large financial expenditure has been
incurred are being run economically and are yielding results
expected of them. Efficiency-cum-performance audit, wherever
used, is an objective examination of the financial and operational
performance of an organisation, programme, authority or function
and is oriented towards identifying opportunities for greater
economy, and effectiveness.

(B) CA Raman Gupta is offered appointment as auditor of a company. One

of his distant uncles held some shares in the same company. Holding of
such shares, by a distant relative, is not prohibited under provisions of
law nor does it affect his independence. Before he could accept
appointment, he received unfortunate news of death of his uncle who

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had died without any children. He came to know that he was nominee
of these shares having substantial value. It landed him in a tricky
situation. What should be proper course of action for him? 5
Ans.
When threats to independence exist, the auditor should either desist
from the task or eliminate the threat or at the very least, put in place
safeguards which reduce the threats to an acceptable level.
Holding of shares involves financial interest in the company and is in
nature of self-interest threat. He has come to hold shares due to
nomination made by his distant relative before accepting the
appointment. Considering above, he should take steps to eliminate the
threat by selling shares immediately before accepting appointment.
Holding of shares of the same company for

(C) While conducting audit of VED Ltd., you as an auditor are not only
prevented in completing certain audit procedures but also are not able
to obtain audit evidence even by performing alternative procedures.
How you will deal with this situation? 4
Ans.
As per SA 705, “Modifications to the Opinion in the Independent
Auditor’s Report”, if, after accepting the engagement, the auditor
becomes aware that management has imposed a limitation on the scope
of the audit that the auditor considers likely to result in the need to
express a qualified opinion or to disclaim an opinion on the financial
statements, the auditor shall request that management remove the
limitation.
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If management refuses to remove the limitation, the auditor shall
communicate the matter to those charged with governance, unless all of
those charged with governance are involved in managing the entity and
determine whether it is possible to perform alternative procedures to
obtain sufficient appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence,
the auditor shall determine the implications as follows:
(1) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material
but not pervasive, the auditor shall qualify the opinion; or

(2) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both
material and pervasive so that a qualification of the opinion would
be inadequate to communicate the gravity of the situation, the
auditor shall:
(i) Withdraw from the audit, where practicable and possible
under applicable law or regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report
is not practicable or possible, disclaim an opinion on the
financial statements.
If the auditor withdraws, before withdrawing, the auditor shall
communicate to those charged with governance any matters regarding
misstatements identified during the audit that would have given rise to
a modification of the opinion.

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5.
(A) What is tolerable misstatement and total rate of deviation?
Discussing meaning of completion memorandum, elaborate upon its
importance. 3+2
Ans.
Tolerable misstatement is a monetary amount set by the auditor in
respect of which the auditor seeks to obtain an appropriate level of
assurance that the monetary amount set by the auditor is not exceeded
by the actual misstatement in the population.
When designing a sample, the auditor determines tolerable
misstatement in order to address the risk that the aggregate of
individually immaterial misstatements may cause the financial
statements to be materially misstated and provide a margin for possible
undetected misstatements.

Total rate of deviation / Tolerable rate of deviation - A rate of

deviation from prescribed internal control procedures set by the
auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance that the rate of deviation set by the auditor is not
exceeded by the actual rate of deviation in the population.

Completion memorandum is a summary that describes the significant

matters identified during the audit and how they were addressed.
Such a summary may facilitate effective and efficient review and
inspection of the audit documentation, particularly for large and
complex audits. Further, the preparation of such a summary may assist
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auditor’s consideration of the significant matters. It may also help the
auditor to consider whether there is any individual relevant SA
objective that the auditor cannot achieve that would prevent the
auditor from achieving the overall objectives of the auditor.

(B) The assistant of CA K is assigned responsibility of drafting “audit

programme” relating to purchases appearing in financial statements of
“Broad Industries”, a partnership firm. The said firm is a GST registered
tax payer and is engaged in manufacturing of packing boxes from a
special type of paper taxable under GST. Help him by drafting a sample
audit programme for purchases. 5
Ans.
Sample audit programme pertaining to purchases
Name of Concern : Broad Industries
Financial Year : 20XX-XX
Prepared by : Name of person with date
Reviewed by : Name of person with date
Approved by : Name of person with date
[Link]. Nature of Procedure Extent of Basis of Done
Check Sample by
(a) Vouch few purchase invoices of
paper from purchase records of
concern.
(b) Trace these invoices into
account books of concern.

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(c) Verify few purchase invoices of
paper on GST portal.
(d) Trace few purchase invoices of
paper in stock records to ensure
that these have been added to
stocks of raw material.

(C) In a bank, all accounts should be kept within the drawing power and
the sanctioned limit. The accounts which exceed the sanctioned limit or
drawing power should be brought to the notice of the management
regularly. Analyse the following points to be considered in the
computation of drawing power in case of bank audit.
(i) Bank's Duties
(ii) Auditor's concern
(iii) Computation of DP
(iv) Stock audit 4
Ans.
Computation of Drawing Power:
(i) Bank’s Duties: Banks should ensure that drawings in the working
capital account are covered by the adequacy of the current assets.
Drawing power is required to be arrived at based on current stock
statement. However, considering the difficulties of large
borrowers, stock statements relied upon by the banks for
determining drawing power should not be older than three
months. The outstanding in the account based on drawing power
calculated from stock statements older than three months is
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deemed as irregular.
(ii) Auditor’s Concern: The stock statements, quarterly returns and
other statements submitted by the borrower to the bank should
be scrutinized in detail. The audited Annual Report submitted by
the borrower should be scrutinized properly. The monthly stock
statement of the month for which the audited accounts are
prepared and submitted should be compared and the reasons for
deviations, if any, should be ascertained.

(iii) Computation of DP: It needs to be ensured that the drawing

power is calculated as per the extant guidelines formulated by the
Board of Directors of the respective bank and agreed upon by the
concerned statutory auditors. Special consideration should be
given to proper reporting of sundry creditors for the purposes of
calculating drawing power.

(iv) Stock Audit: The stock audit should be carried out by the bank
for all accounts having funded exposure of more than I 5 crores.
Auditors can also advise for stock audit in other cases if the
situation warrants the same. Branches should obtain the stock
audit reports from lead bank in the cases where the Bank is not
leader of the consortium of working capital. The report
submitted by the stock auditors should be reviewed during the
course of the audit and special focus should be given to the
comments made by the stock auditors on valuation of security
and calculation of drawing power.
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6.
(A) CA P is conducting stock audit of a borrower availing cash credit facility
of `100 lacs from branch of a bank. The cash credit facility is against
security of paid stocks and debtors up to 90 days. Margin stipulated is
25% for stocks and 40% for debtors. Following further information is
available as on 31.12.22: -

Value of stocks ` 125 lacs

Value of stocks (fully damaged) included in above 5 lacs
Value of debtors 50 lacs
Value of debtors exceeding 90 days included in above 10 lacs
Value of creditors for goods 10 lacs
Is Drawing Power computed by CA P for ` 82.50 lacs proper? 4
Ans.
The computation of Drawing power is as under: -
Value of stocks as on 31.12.22 ` 125 lacs
Less: value of damaged stocks ` 5 lacs
` 120 lacs
Less: creditors for goods as on 31.12.22 ` 50 lacs
Value of Paid stocks ` 70.00 lacs
Less: Margin @ 25% `17.50 lacs
Drawing power (A) ` 52.50 lacs
Value of debtors as on 31.12.22 ` 50 lacs
Less: debtors exceeding 90 days ` 10 lacs
` 40 lacs

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Less: Margin @ 40% ` 16 lacs
Drawing Power (B) ` 24 lacs
Drawing Power (A+B) ` 76.50 lacs
The drawing power calculated by CA P is not proper. Drawing Power
comes to ` 76.50 lacs.
OR

(A) As per SA-315, “Identifying and Assessing the Risk of Material

Misstatement through Understanding the Entity and Its Environment”,
the auditor shall obtain an understanding of the relevant industry,
regulatory and other external factors including the applicable financial
reporting framework. Explain giving examples. 4
Ans.
As per SA-315, “Identifying and Assessing the Risk of Material
Misstatement through Understanding the Entity and Its Environment”,
the auditor shall obtain an understanding of the relevant industry,
regulatory and other external factors including the applicable financial
reporting framework. For Example
• The competitive environment, including demand, capacity, product
and price competition as well as cyclical or seasonalactivity.
• Supplier and customer relationships, such as types of suppliers and
customers (e.g., related parties, unified buying groups) and the
related contracts with those entities.
• Technological developments, such as those related to the entity’s
products
• Energy supply and cost.
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• The effect of regulation on entity operations.

(B) WTE Private Limited is engaged in business of manufacturing a

product liable to GST @ 5%. The input raw materials for manufacturing
this product are liable to GST @ 12% and 18%. As a result, at the end of
financial year, ITC on inputs amounting to ` 60 lacs is accumulated in
Electronic Credit ledger and refundable to company under provisions
of GST law. How would above amount of ` 60 lacs be reflected and
classified in balance sheet of company? State few audit procedures to
be performed by you for verification of abovesaid balance. 5
Ans.
In the given situation, ` 60 lacs is accumulated in Electronic credit
ledger of WTE Private Limited as finished product is liable to lower GST
rate whereas input raw materials for manufacturing carry higher GST
rate. It is refundable to company by virtue of provisions of GST law. The
above balance would be reflected and classified under current assets.
Within current assets, it would be classified into “Other current assets”.
Few audit procedures to be performed for verification of above balance are:

➢ In relation to balances with statutory authorities like GST input

credit, prepare a reasonability analysis with respect to purchases by
applying the applicable rate to the purchases and in case of any
variance with the asset recorded by the entity, reasons for variance
should be requested from the entity.

➢ Obtain copies of statutory GST returns filed on GST portal.

➢ In case refundable amount as on balance sheet date is still

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outstanding, verify whether the amount recorded as per books of
account tallies with the claim made with the authorities
subsequently by going to GST portal.

➢ In case refundable amount as on balance sheet date is received

subsequently, verify it from Bank statement.

(C) M/s Suresh Chandra & Co. has been appointed as an auditor of SC Ltd.
for the financial year 2021-22. CA. Suresh, one of the partners of M/s
Suresh Chandra & Co., completed entire routine audit work by 29th
May, 2022. Unfortunately, on the very next morning, while roving
towards office of SC Ltd. to sign final audit report, he met with a road
accident and died. CA. Chandra, another partner of M/s Suresh Chandra
& Co., therefore, signed the accounts of SC Ltd., without reviewing the
work performed by CA. Suresh. State with reasons whether CA.
Chandra is right in expressing an opinion on financial statements the
audit of which is performed by another auditor. 5
Ans.
Relying on Work Performed by Another Auditor
REVIEW OBJECTIVES
As per SA 220 “Quality Control for an Audit of Financial Statements”, an
engagement partner taking over an audit during the engagement may
apply the review procedures such as the work has been performed in
accordance with professional standards and regulatory and legal
requirements; significant matters have been raised for further
consideration; appropriate consultations have taken place and the
resulting conclusions have been documented and implemented; there is
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a need to revise the nature, timing and extent of work performed; the
work performed supports the conclusions reached and is appropriately
documented; the evidence obtained is sufficient and appropriate to
support the auditor’s report; and the objectives of the engagement
procedures have been achieved.

NO DELEGATION OF ACCOUNTABILITY
Further, one of the basic principles, which govern the auditor’s
professional responsibilities and which should be complied with
wherever an audit is carried, is that when the auditor delegates work to
assistants or uses work performed by other auditor and experts, he will
continue to be responsible for forming and expressing his opinion
on the financial information. However, he will be entitled to rely on
work performed by others, provided he exercises adequate skill and
care and is not aware of any reason to believe that he should not have so
relied. This is the fundamental principle which is ethically required as
per Code of Ethics.
However, the auditor should carefully direct, supervise and review
work delegated. He should obtain reasonable assurance that work
performed by other auditors/experts and assistants is adequate for his
purpose.

CONCLUSION

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In the given case, all the auditing procedures before the moment of
signing of final report have been performed by CA. Suresh. However,
the report could not be signed by him due to his unfortunate death.
Later on, CA. Chandra signed the report relying on the work performed
by CA. Suresh. Here, CA. Chandra is allowed to sign the audit report,
though, will be responsible for expressing the opinion. He may rely
on the work performed by CA. Suresh provided he further exercises
adequate skill and due care and review the work performed by
him.

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